Prime Minister Ehud Olmert convened Wednesday's meeting to discuss the emerging deal. Israel has been demanding an end to Hamas rocket attacks and arms smuggling, as well as the freedom of Sgt. Gilad Schalit, who was captured in a cross-border raid in June 2006 and has been held in Gaza since then.
Hamas wants an end to Israel's devastating economic blockade of Gaza, including the opening of its border crossings. It says the soldier's release should be handled separately and, in return, is demanding freedom for hundreds of Palestinian prisoners, including some convicted of participating in or planning some of the bloodiest Palestinian attacks against Israel.
Hamas is desperate to reopen the Gaza borders, and fears that negotiations over the prisoner swap could keep the crossings closed indefinitely. As long as the borders are closed, efforts to repair the heavy damage in Gaza will remain frozen because of dire shortages of cement, glass, nails and other basic supplies. Thousands of homes were damaged or destroyed, and the basic infrastructure was hit hard during the offensive.
In their decision, the ministers said there could be no deal on the borders before Schalit comes home safely.
"I don't think we need to open the crossings until the issue of Gilad Schalit is resolved," Olmert told the gathering, according to his office.
"Three years have passed and we think we cannot come to any agreement with Hamas or Egypt without solving the issue of Gilad Schalit," added Cabinet minister Meir Sheetrit, one of the meeting participants.
Government spokesman Mark Regev said Israel would continue to allow limited food and humanitarian items into Gaza in the meantime.
Regev said the ministers also approved a number of prisoners that could be released in exchange for Schalit. He declined to elaborate further, saying only that Israel realized there would be a heavy cost.
"Releasing Gilad Schalit will require us to pay a painful price. We will have to release terrorists, people who are guilty of very difficult crimes," Regev said. "The ministers supported and understood this."
Olmert has been eager to work out a deal before he leaves office in the coming weeks. But Wednesday's decision indicated that negotiations could be prolonged.
Hamas officials, both in Gaza and in the group's exiled leadership in Syria, accused Israel of undermining the Egyptian efforts.
Egypt's president, Hosni Mubarak, was quoted as saying Tuesday that the Schalit issue should "in no way be linked to the truce negotiations." There was no immediate reaction Wednesday.
Ali Baraka, a Hamas leader based at the group's Damascus headquarters, said Israel's decision "comes in the face of Egyptian efforts because this position is one of obstinacy."
"If the enemy government wants to win the release of Schalit it must release the prisoners that the resistance groups want. To tie the two tracks undermines the Egyptian efforts and is a blow to these efforts," he said.
Israel and Egypt clamped a blockade on Gaza after Hamas overran the crowded sliver of territory in 2007, allowing in little more than basic humanitarian supplies.
At stake in the truce talks is stabilizing Gaza after Israel's offensive, which aimed to stop years of Hamas rocket attacks on southern Israel. Some 1,300 Palestinians were killed, more than half of them civilians, according to Gaza health officials. Thirteen Israelis, including three civilians, were also killed.
Since the fighting ended, there has been sporadic rocket fire from Gaza, triggering Israeli airstrikes aimed at smuggling tunnels and Hamas outposts. Early Wednesday, Israeli aircraft struck smuggling tunnels under the Gaza-Egypt border and a Hamas security base near the town of Khan Younis. There were no reports of casualties.
Later in the morning a rocket fired from Gaza exploded on open ground in southern Israel, police said. There were no reported casualties.
Olmert will step down after a new government is formed following last week's parliamentary election. The results of the vote were inconclusive, and it is expected to take several weeks before either of the top two vote-getters, Foreign Minister Tzipi Livni or opposition leader Benjamin Netanyahu, can form a new coalition government.
Israel's ceremonial president, Shimon Peres, was set to begin several days of consultations with political parties on Wednesday before designating a candidate to form a government.
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Associated Press writer Albert Aji in Damascus contributed to this report.
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