An Israeli minister had said movement of the men to Palestinian Authority supervision in Jericho could help Israel to decide to lift a siege of Arafat and pull out of the West Bank town of Ramallah, the Palestinians' administrative headquarters
Abdel Fattah Hamayel, a Palestinian minister responsible for negotiating with the militants, said "the principal issue" in the dispute had been resolved.
"They will not be sent to Jericho, they will not be arrested," he said. "What is still being negotiated is how their security can be assured."
The standoff over the militants illustrated tensions that are slowing progress on the "road map" peace plan. Israel says the Palestinians must dismantle militant groups as required by the U.S.-backed plan. The Palestinians say they fear civil war and need time to persuade the militants to disarm.
Tensions erupted Saturday at the compound to which Arafat has been effectively confined for a year and a half. A leader of the detained militants, Kamal Ghanam, said Arafat had asked them to leave to ease the pressure on him. They refused and were confined by guards within the headquarters.
Israel and the United States accuse Arafat of fomenting terrorism and are boycotting him. Israel says he is free to leave his headquarters — much of which has been leveled by Israel's military — but might not be allowed to return.
Israeli sources had suggested that sending the militants to the relatively isolated and calm West Bank town of Jericho would make it easier for Israel to withdraw from Ramallah.
Israeli Cabinet minister Meir Sheetrit said that if the militants went to Jericho, "the attitude of Israel towards ... Ramallah will change upside down and we will make another step towards the peace process."
Ghanam said a deal had been reached allowing the militants to remain at the compound provided they upheld a truce and only had contact with their families.
Hamayel said it was not clear whether the militants would stay at the compound or be moved elsewhere in Ramallah and the two sides were meeting with American intermediaries to discuss the wider issue of militants wanted by Israel.
The detained militants are from the Al Aqsa Martyrs' Brigades, a violent group affiliated with Arafat's Fatah movement that has killed scores of Israelis, primarily in shooting attacks. Fatah joined the Islamic militant groups Hamas and Islamic Jihad in declaring a cease-fire on June 29, but Al Aqsa is loosely organized and leaders of some branches have refused to abide by the truce.
Israeli police on Sunday shot a driver after he failed to stop at a roadblock near Jerusalem. Israeli media reported the man was Palestinian and died of his wounds.
Palestinian Foreign Minister Nabil Shaath and his Israeli counterpart, Silvan Shalom, also met later Sunday to discuss the road map, which aims to end nearly three years of violence and establish a Palestinian state by 2005.
An Israeli ministerial committee also was meeting on Sunday to work out details of a release of several hundred of the 7,700 Palestinian prisoners Israel holds, including some members of Islamic militant groups.
A senior Israeli official said the committee would consider broadening the criteria for release to include prisoners on awaiting trial. Palestinians want all the prisoners freed.
The prisoner issue is one of several issues slowing progress on implementing the peace plan. The Israeli army also said Sunday it had yet to remove any of the six unauthorized settlement outposts ordered dismantled on Saturday.
Separately, Israeli police searching for a missing teenager said Sunday that they did not believe she had been abducted by militants.
Dana Bennet, 18, disappeared after leaving her waitressing job in Tiberias, northern Israel, early Friday. Concerns for her safety were high after the body of 20-year-old soldier Oleg Shaichat was found in the same region of the country Monday, a week after he disappeared. Nobody claimed responsibility for Shaichat's death, but police suspect Palestinians or Israeli Arabs.
Hezbollah guerillas in southern Lebanon, meanwhile, said they had fired on Israeli aircraft that entered Lebanese airspace.
The Israeli army said three separate salvos of anti-aircraft were fired across the border but would not say if Israeli planes were flying in the area. Rescue workers said seven people had been hospitalized suffering from shock.
The Lebanese militant group routinely responds to Israeli air force flights over Lebanon with anti-aircraft fire.