Foreign Minister Silvan Shalom said the outlines of the deal with the Lebanese guerrilla group — how many prisoners, their country of origin and the criteria for their release — were being wrapped up in talks between a German mediator and Ilan Biran, director general of Israel's Defense Ministry.
"There is no doubt that the picture today is that the deal is closer than ever," Shalom told Israel's Army Radio.
At the same time, Israel's three-day military operation in a Gaza Strip refugee camp has left about 400 Palestinian families homeless, local officials said Monday, as the interim Palestinian Cabinet prepared to meet in the West Bank.
The new Palestinian prime minister, Ahmed Qureia, has told the ruling Fatah party he wants to quit once the term of his temporary government expires because of sharp disagreements with Yasser Arafat over the appointment of a security chief.
"The same government will continue from 20 to 25 days, and after that there will be a new government, with a new prime minister," Qureia said.
However, with the deadline three weeks off, there is still time to settle the differences, Palestinian officials said.
Meanwhile, a leading American conservative, Richard Perle, says Israel missed a major diplomatic opportunity last year when President Bush called for separate Jewish and Palestinian states on June 24, 2002.
"This speech was very important, and Israel's leadership should have grabbed it with both hands," Perle told Haaretz newspaper.
Instead, said the longtime Pentagon adviser, Israel equivocated, allowing the current "road map" peace plan — which Perle opposes — to materialize.
Had Israeli Prime Minister Ariel Sharon seized the opportunity, all the pressure could have been placed on the Palestinians.
The German-brokered prisoner exchange would involve trading Israeli businessman Elhanan Tannenbaum and the bodies of three Israeli soldiers for several hundred Arab prisoners, including Palestinians.
Tannenbaum was kidnapped in October 2000 on a trip to the United Arab Emirates, and the three soldiers were abducted along the Israeli-Lebanese border in 2000.
The Tannenbaum family has been trying to suppress information surrounding his capture and alleged shady business dealings. The family appealed to the Supreme Court on Monday to try to overturn a lower court's ruling to lift a gag order on the details of his capture. A decision was expected later Monday.
Prime Minister Ariel Sharon said in an interview with The Jerusalem Post that if the rumors about Tannenbaum turned out to be true he would stand trial in Israel.
"If it becomes clear that he did something illegal, he will be punished here. We cannot allow Hezbollah to act as our representative to punish him," Sharon said.
In addition, a debate rages in Israel over whether Lebanese guerrilla leader Mustafa Dirani should be released, without Israel getting at least information about Ron Arad, an Israeli airman who was shot down over Lebanon in 1986.
Dirani was one of Arad's captors, and was snatched by Israeli commandos in 1994, to be used as a bargaining chip to secure the airman's release.
Referring to the debate, Shalom said: "Every decision that the government will make either way will be publicly criticized."
Sharon told the Jerusalem Post that a deal to release Tannenbaum would not hurt Israel's ability to weave together a separate deal on Arad. He said he had ordered the security establishment to investigate recent media reports that Arad was being held in a prison near Tehran.
"If the prisoner exchange would make it impossible to bring about the release of one of our missing soldiers, it would be different, but we tried for many years to find Ron Arad and — despite all our intelligence capabilities — we didn't succeed," Sharon said.
Israeli troops withdrew from the Rafah refugee camp on the Gaza-Egypt border on Sunday, after a three-day operation the military said was aimed at finding and destroying weapons smuggling tunnels. Three tunnels were shut down.
The raid, the biggest in Gaza in six months, was accompanied by heavy fighting between soldiers and Palestinian gunmen. Eight Palestinians, including two children, were killed, and dozens were wounded.
Saed Zoarub, the mayor of the town of Rafah next to the camp, said Monday that between 100 and 120 houses were demolished and another 70 damaged, leaving about 400 families homeless.
The area targeted was the camp's Yabena neighborhood, next to the Gaza-Egypt border. Several of the houses were blown up, while the remainder were razed by army bulldozers. It was the largest-scale demolition in a single raid since the outbreak of Israeli-Palestinian fighting three years ago.