Egypt's intelligence chief Omar Suleiman on Wednesday said after talks with Israeli officials that negotiations over the release of captured Israel Defense Forces soldier Gilad Shalit were nearing an end.

"The affair will reach its conclusion very soon," he told reporters after meeting Minister Benjamin Ben-Eliezer.

Prime Minister Ehud Olmert said Wednesday that he was "very satisfied" with talks between Defense Minister Amir Peretz and Suleiman in Tel Aviv earlier in the day.

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The two met to discuss a prisoner exchange for Shalit and the shaky truce between Israel and the Palestinians in Gaza, which came into effect Sunday.

"We are going to discuss strategic security matters," Peretz as he welcomed Suleiman to his office at the Defense Ministry. "Today's guest is one of the most important and influential guests, and a great contributor to the shaping and stability of the current situation, a supporter of peace.

"There is no doubt that his presence today, given the situation, is significant and will have significance in the future as well," he said.

Shalit has been held by Palestinian militants since his abduction during a cross-border raid on his IDF base in June.

Olmert said in his Sde Boker speech earlier this week that Shalit's return was a precondition for diplomatic negotiations with the PA, but that Israel would release many Palestinian prisoners, including those serving lengthy sentences, once Shalit has been freed.

During the meetings, Suleiman was to brief Peretz and Olmert on his talks with Khaled Meshal, the head of Hamas' political bureau, last week. After these talks, the Egyptians said that progress had been made toward finalizing a prisoner exchange. He was also to discuss ways to shore up the cease-fire and other issues related to efforts to promote diplomatic negotiations between Israel and the PA.

But according to a source familiar with the negotiations over Shalit, these talks are currently at an impasse due to disagreements over how many Palestinian prisoners Israel will free in exchange for Shalit.

The source said Hamas is willing to defer discussion of two other potential sticking points - the severity of the crimes committed by the prisoners to be released and the exact identity of these prisoners - but is insisting that Israel release at least 1,000 prisoners.

That is down from its earlier demand of 1,400, but Israeli negotiators told Egypt, which is mediating the talks, that Olmert had authorized them to agree to a maximum of 300 prisoners.

Despite this problem, another source involved in the talks predicted that a deal could be finalized within a matter of weeks. "By Id al-Adha [the Feast of the Sacrifice], which occurs at the end of December, it is possible to conclude the deal," he said.

But a senior Israeli official predicted that the prisoner exchange would ultimately only occur as part of a package deal that would include Israeli recognition of a new Palestinian government, the resumption of European aid to the PA, and a transfer of the taxes Israel collects on the PA's behalf, but has refused to release since Hamas took power, on the grounds that it is a terrorist organization committed to Israel's destruction.

Palestinian officials have repeatedly said a deal is close, but Israeli defense officials say the negotiations are far from over.

According to reports, Hamas is demanding the release of the prisoners in three stages. In the first phase, Hamas-allied militants would free Shalit and hand him to the Egyptians. At the same time, Israel would free women prisoners and minors in its custody.

Among those Hamas wants freed are Hamas prisoners serving long sentences and Marwan Barghouti, a senior official in Palestinian Authority Chairman Mhamoud Abbas' Fatah movement who is serving five life sentences for his involvement in attacks on Israelis.

Kadoura Fares, a former Fatah legislator, said Wednesday he received personal assurances from Meshal that Barghouti would be part of any swap.

Abu Mujahed, a spokesman for the Popular Resistance Committees, one of three militant groups involved in Shalit's capture, said there was no agreement with Israel on the number of Palestinian prisoners to be freed or a timetable for the swap.

Abu Mujahed said the Palestinian factions have not yet presented a list with names of prisoners it wants freed.

Earlier this week, senior Defense Ministry official Amos Gilad said there was progress in the talks, but suggested Hamas' demands were not acceptable to Israel.

Hamas "has a tendency to demand prices that are very high, to establish its position and to weaken all the moderate forces," Gilad said.