The Palestinians on Thursday rejected an Israeli offer to release 900 prisoners as a gesture to Palestinian Authority Chairman Mahmoud Abbas, calling the proposal "insulting."

Palestinian cabinet minister Saeb Erakat criticized Israel's offer, saying it was freeing only people serving relatively short terms. However, he also told Israel Radio that it is possible to solve the dispute within a few hours if Israel is willing to reopen discussion on the topic.

"We want them to release those who spent more than 20 years in jail," he said. "It is not what we want. It is not what our people want."

The prisoner release, along with a package of other gestures and a series of Israeli-Palestinian security understandings, had been approved earlier Thursday by the seven-member diplomatic cabinet, following a stormy debate.

The panel authorized the release of 900 Palestinian prisoners in two groups - 500 immediately and the rest in another three months.

However, the criteria for release are the same as in previous prisoner releases, meaning that no one with "blood on his hands" (i.e. who killed an Israeli) will be freed.

This restriction aroused the Palestinians' ire at a meeting with Prime Minister Ariel Sharon's adviser, Dov Weisglass, later in the day.

"This is an insulting proposal," a Palestinian involved in the meeting said. "You're hurting Abu Mazen [Abbas] rather than coming toward him. You need to release all 237 prisoners jailed before the [1993] Oslo Accords. That's what's important to us - not the 900 you are proposing. You aren't coordinating the names with us."

The Palestinians - Saeb Erekat, Mohammed Dahlan and Hassan Abu Libdeh - said the proposal should be reconsidered. But the Israelis, headed by Weisglass, said that this was the final offer: No additional prisoners would be freed, and none with "blood on their hands."

The Palestinian Authority informed Egypt and Jordan after the meeting that the prisoners issue has not been resolved, Palestinian sources said.

The crisis over the prisoner releases was largely predictable, since this is an ideal time for the Palestinians to demand additional Israeli concessions: U.S. Secretary of State Condoleezza Rice arrives Sunday, and a four-way summit between Sharon, Abbas, Egyptian President Hosni Mubarak and King Abdullah of Jordan is scheduled for Tuesday.

Both Rice and the summit participants are expected to press Israel on its gestures.

It is still unclear whether Rice also will attend the summit. The Palestinians want her there, but Israel is unenthusiastic.

In addition to the prisoner releases, the diplomatic cabinet approved several other Israeli gestures Thursday.

First, Israel will gradually transfer five West Bank cities to Palestinian control. Jericho will be handed over immediately, followed by Bethlehem, Qalqilyah, Tul Karm and Ramallah. For now, however, Israel will retain control over Hebron, Jenin and Nablus, which are considered greater security risks.

In addition, a joint Israeli-Palestinian committee, which will begin meeting next week, will be set up to "launder" Palestinians wanted by Israel. In exchange for Israel not pursuing these men, they will have to turn in their weapons to the PA, sign a pledge to refrain from violence, and remain in their own cities, under PA supervision.

However, defense sources stressed, this is not an amnesty, and should the fighting resume, Israel will renew its pursuit of these men.

Finally, Israel will allow the PA to build a seaport in Gaza, reopen the Karni checkpoint between Israel and Gaza, and lift closures and other movement restrictions. However, it will not allow the Dehaniyeh Airport to reopen.

The main argument at the meeting was over the prisoner releases, and participants were divided into two camps. One camp, which favored generosity toward the Palestinians, included Israel Defense Forces Chief of Staff Moshe Ya'alon, head of Military Intelligence Aharon Ze'evi-Farkash and Amos Gilad, the head of the Defense Ministry's diplomatic-security unit, as well as Ministers Shaul Mofaz, Ehud Olmert, Shimon Peres and Haim Ramon. The other, which advocated caution, included Shin Bet security service chief Avi Dichter and Ministers Silvan Shalom and Benjamin Netanyahu.

Farkash and Ya'alon argued that the prisoners are the most important issue for the Palestinians, and therefore, recommended releasing murderers whose crimes were committed before Oslo, who have served at least 20 years, and who now support Abbas. Dichter objected vehemently, saying this would impair the deterrent effect of arrests.

Peres charged that the "blood on their hands" criterion was outdated, while Ramon proposed offering early release to murderers who were anyway due to be freed by early next year.

Netanyahu, however, demanded that no murderers be released, and Sharon also opposed freeing killers, though he hinted that Israel might make exceptions for elderly or ill prisoners.

Shalom objected to releasing prisoners from Hamas, saying this would make it easier for Europe to remove Hamas from its list of terrorist organizations.

Gilad, once known for his hardline positions, surprised the participants by suggesting that 1,000 prisoners be released, instead of the 500 originally proposed by the defense establishment. "Arafat has gone, and we need to be as generous as possible," he said. "There's been a deep strategic change that we need to exploit, and we must also prevent Israel from being accused in case of failure."

Sharon agreed that Abbas' election created an opportunity that Israel must seize. "Prisoner releases and deals over wanted men are unpleasant, but we need to decide whether we want to utilize this opportunity, or not," he said. "If there's a violation on their side, our commitments will also be null and void."

In the end, a compromise was reached: No murderers would be released, but the number of freed prisoners would be upped to 900.

Defense officials also told the cabinet that the Palestinians had asked to include two senior wanted men on the joint committee dealing with this issue.

The Israelis vetoed one, Tawfik Tirawi, who heads the General Intelligence Service in the West Bank, since he has "blood on his hands." But they agreed to reexamine the case of the other, Rashid Abu Shabak, who heads the Preventive Security Service in Gaza, and will probably decide to accept him as an interlocutor.