Israeli media reports say the Israeli military is preparing to pull out of northern Gaza Strip, and turn over security to Palestinian authorities.
Israel's army radio reported that details are still being worked out, but that the move could some soon.
Both Israelis and Palestinians have been under pressure from Washington to take steps to salvage the so-called "road map" international peace plan, a plan that has been severely undermined by a week of violence in which more than 60 people on both sides of the conflict were killed.
President Bush's special envoy for the Middle East, John Wolf, arrived in Jerusalem late Saturday and is to hold separate talks with leaders of both sides in the coming days. He and his 15 member delegation were originally to monitor implementation of the first confidence-building steps of the road map. Now, its focus has shifted to trying to calm the situation.
Despite the diplomatic initiative and signs of movement on some issues, tensions remain high. Israeli Prime Minister Ariel Sharon is reported to have told his weekly cabinet meeting Sunday that he will continue to take action against terror threats and that he has American approval to do so, even if it means further incursions into Palestinian areas.
He was apparently responding to recent reports that Washington had asked him to end the Israeli policy of targeted assassinations.
Meanwhile, violence continued in northern Gaza, where a Palestinian militant was shot dead by Israeli troops. Several other Palestinians were reported wounded in the Israeli raid on the town of Beit Hanoun.