More than 11,000 Palestinians, including women and children, reportedly remain in Israeli jails. The possible deal could include the release of 1,000 Palestinian detainees in exchange for captive Israeli soldier Gilad Shalit who is being held in Gaza.
A German mediator has brought Israel's latest proposal on a prisoner swap to the Palestinian militant group Hamas.
Israel has attached tough new conditions to an emerging prisoner swap with Hamas, the Islamist group that rules the Gaza Strip.
According to state-run Israel Television, Israel is demanding the deportation of 125 Palestinian prisoners to Gaza or abroad. The 125 are among 1,000 Palestinian detainees Israel is prepared to release in exchange for captive Israeli soldier Gilad Shalit who is being held in Gaza. He was captured by Hamas gunmen in a cross-border raid three and a half years ago.
The prisoners slated for deportation were involved in deadly attacks on Israelis. Israel does not want them to return home to the West Bank because they are perceived as a terror threat to nearby Israeli cities. Gaza, by contrast, is under a tight blockade.
Israeli counter-terrorism expert Yossi Melman says Israel is swallowing a bitter pill.
"We are going to release terrorists who have been involved in horrific acts of murder and violence and terrorism," he said.
Therefore, he believes deportation makes the deal more palatable to the Israeli public.
"This is a reasonable, sensible demand by Israel," he said.
Hamas officials say they will need several days to study the Israeli proposal. But Melman does not expect a positive response.
"I do not think that Hamas would change its spots, would compromise," he said.
It is a charged issue on both sides. Hamas wants to win points with the Palestinian public, which sees the prisoners as freedom fighters who should be allowed to return home.
Israelis, on the other hand, are divided. Many say it is part of the national ethos to bring captive soldiers home at any price. But others see the prisoner swap as a mockery of Israeli justice and a reward for terrorism.