Israel has agreed to free all 450 of the prisoners demanded by Hamas in exchange for kidnapped Israel Defense Forces soldier Gilad Shalit, and the dispute now revolves around Israel's demand that some of these prisoners be deported rather than returned home, Palestinian sources in Cairo said yesterday.

Ofer Dekel, Israel's lead negotiator on the issue, was in Cairo yesterday for further talks with Egyptian mediators.

According to the sources, Israel is insisting that several dozen of the released prisoners be exiled abroad and that others be released to Gaza rather than the West Bank. However, Hamas has thus far agreed to the deportation of only a handful of prisoners, and has conditioned even this on the consent of the prisoners to be deported. It also opposes releasing prisoners to Gaza rather than the West Bank.

Though Hamas officials are concerned that a deal might be harder to strike once a new Israeli government takes office, they insist that they will not agree to any further compromises. Senior Hamas official Mahmoud A-Zahar even denied yesterday that talks were taking place at all and said Israeli reports of progress are false.

"Hamas isn't talking with anyone about a prisoner exchange for Shalit," he told the Nazareth-based newspaper Kul al-Arab by telephone from Cairo. "If anyone's holding negotiations, it isn't us."

Abu Obeida, a spokesman for Hamas' military wing, also denied reports of progress in the talks.

"It's a lie," he told Kul al-Arab. "The talks with Egypt on the matter are currently frozen."

Meanwhile, Hamas and Fatah continued their reconciliation talks in Cairo yesterday. The talks are expected to continue at least through tomorrow.