Israel has softened its terms for a prisoner swap with Hamas and the two are nearing a deal to exchange hundreds of jailed Palestinians for an Israeli soldier held in the Gaza Strip, said officials, close to the talks.

A delegation from Hamas, the Islamist group that controls the Gaza Strip, crossed into Egypt for a meeting with Egyptian security officials in Cairo to discuss the deal that Egypt and Germany have been mediating.

The officials said Israel agreed to include in the exchange for soldier Gilad Shalit some 160 prisoners whose release it previously vetoed. But both sides have publicly avoided comment or sought to play down talk of an imminent deal.

Shalit was captured by Hamas-led gunmen who tunnelled into Israel from Gaza in 2006. Israel has linked any major easing of its blockade on the territory to the soldier's return home.

"The Shalit episode is about to be closed," one of the officials said.

Sources on both sides told Reuters there were hopes that a deal might be struck by the end of the week, when the Muslim festival of Eid al-Adha begins. But one Hamas official, Sami Abu Zuhri, sought to play down speculation that a deal was done.

"We stress that it is premature to talk about any results regarding the prisoner swap deal," Abu Zuhri told Reuters.

In Jerusalem, Israeli officials declined to discuss in detail prospects for a deal with Hamas, a group that has rejected Western demands to recognise Israel, renounce violence and accept existing interim Israeli-Palestinian peace accords.

But Prime Minister Benjamin Netanyahu, facing questions from his rightist Likud faction in a closed-door meeting, made clear he saw no breakthrough soon and that any Palestinian prisoner amnesty would be vetted by the Israeli parliament and cabinet.

"The reason that there is no discussion right now in the faction, and there is no discussion in the cabinet, is that there is no deal and no decision," Netanyahu told the lawmakers, according to an Israeli official who requested anonymity.

"It is still not clear what is happening on the other side with the various demands. This will become clear with time."-Reuters