Israel also announced that it will permit Yasser Arafat to travel to the Gaza Strip to visit the grave of his sister Yousra, who died earlier this week and was buried in Gaza City, Israel TV reported. It would be Arafat's first time leaving his besieged compound in Ramallah in more than a year and a half.
The agreement in principle to hand over the West Bank towns was reached in a meeting Friday between Israeli Defense Minister Shaul Mofaz and Palestinian Security Chief Mohammad Dahlan, Israeli and Palestinian officials said.
The towns to be handed over were Ramallah, Tulkarem, Qalqiliya and Jericho.
"We have agreed on Israeli withdrawal from four Palestinian cities in the West Bank in the coming two weeks," Dahlan said. "The meeting was very constructive."
Implementation of the road map peace plan has been held up in recent weeks in a dispute over the release of Palestinian prisoners and demands for a crackdown on Palestinian militants. In the meantime, a key truce by militants has been shaken by two suicide bombings this week that killed one person and other violence.
So far, Israel has returned to Palestinian control the West Bank town of Bethlehem and parts of the Gaza Strip.
Israel freed 73 Palestinian detainees on Friday, the second group in less than two weeks, though Palestinians dismissed the release as insufficient. The Palestinians also announced they intercepted $3 million in foreign funding for the militant group Islamic Jihad.
Israeli officials confirmed that the four cities would be handed over, starting next week with Jericho and Qalqiliya.
The other two cities would be given to Palestinian control the following week, providing certain conditions are met, said Shirli Eden, a spokeswoman for the Ministry of Defense. She said the conditions include: "No terrorist attacks, the Palestinians begin to dismantle the terrorist infrastructure and the Palestinians create an apparatus for dealing with wanted people."
Eden added that Israel will make a number of humanitarian gestures, including reducing the number of roadblocks in the West Bank and providing additional permits for Palestinian workers in Israel.
There was no immediate comment on the television report that Arafat would be allowed to go to Gaza. His sister, Yousra Abdel Raouf Al Kidwah, was buried Thursday in Gaza City, but Arafat was unable to attend. Since Israel began surrounding and battering Arafat's Ramallah headquarters, it has said he could leave to travel to Gaza or overseas but may not be permitted to return.
The Palestinians have refused to dismantle militant groups, fearing it would spark civil war, and have instead tried to reinforce the cease-fire in place since June 29, which has dramatically reduced casualties after 33 months of violence.
The seizure of the money headed to Islamic Jihad was a rare announcement of Palestinian action against militants' funding. The money came from "outside, non-Palestinian" sources, said Abdel Fattah Hamayel, a Cabinet minister in charge of negotiating with militant groups. He did not provide further detail.
Islamic Jihad officials denied the money was meant for the group. "This is the first that I hear of it," said Mohammed al-Hindi, an Islamic Jihad leader in the Gaza Strip.
The Israeli daily Haaretz, citing Israeli sources, said the money came from Iran and was intercepted recently.
Hamayel said the Palestinian Authority is making progress in identifying sources of funding, monitoring e-mails and phone calls between people and groups in the Palestinian territories and foreign countries. He said the money interception is part of a Palestinian strategy to stop outsiders from interfering in Palestinian affairs.
Renegade bands of militants loosely linked to Yasser Arafat's Fatah movement have acknowledged that they receive money from Iran, through Fatah officials in Lebanon.
A Fatah breakaway group funded by Iran was responsible for one of two suicide bombings this week, according to its members. Hamayel confirmed that the splinter group received money from abroad, but did not identify the country.
According to Hamayel, "outside funders" are working to sabotage the cease-fire by luring local Palestinian militants with money.
"There are groups outside that are taking advantage of Palestinian factions inside Palestine by providing financial incentives," said Hamayel. "We now know that these groups are very clearly in opposition to maintaining calm."
Israeli government spokesman Dore Gold said Friday that any efforts to halt funding to militants was "positive" but stressed that the seizure of the $3 million was only a small step.
"We are still seeing massive amounts going from Saudi Arabia to Hamas," said Gold who recently testified before the U.S. Senate on alleged Saudi funding of terrorism. Gold said the Saudi money comes largely from charities he said have strong ties to the government.
Meanwhile, 73 Palestinian detainees were released from Israeli jails Friday and driven to the West Bank and Gaza Strip. The prisoners had been scheduled for release Tuesday, but Prime Minister Ariel Sharon had them returned to their cells after Palestinian militants set off two suicide bombings that day.
On Aug. 6, Israel released 334 prisoners, but Palestinians said at the time too few were senior figures. The Palestinians seek the release of most of more than 7,000 prisoners held by Israel.
Palestinian spokesman Saeb Erekat dismissed Friday's release as a public relations ploy. Most of those freed had been held on criminal charges or for staying in Israel illegally.