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Hezbollah has renewed its demand for the release of Palestinian prisoners as part of an exchange with Israel that would see the return of two Israeli reservist soldiers snatched in a raid across the Israel-Lebanon border almost two years ago.

The Hezbollah demand was presented to Prime Minister Ehud Olmert on Sunday by Israeli negotiator Ofer Dekel, after being passed on by the German team mediating the swap efforts.

Israel strongly opposes the demand to release Palestinians - a message it passed on to the mediation team some two months ago.

Olmert held consultations on Sunday with defense officials, ahead of approving the deal with Hezbollah to return kidnapped soldiers Eldad Regev and Ehud Goldwasser.

Security sources told Haaretz that previous reports notwithstanding, Defense Minister Ehud Barak supported the outlines of the proposed deal. Most other ministers are also said to favor the swap.

Still, many defense officials - most prominently Mossad chief Meir Dagan - oppose advancing the deal, fearing the future of implications of swapping live prisoners for soldiers' bodies.

A senior official in the Prime Minister's Bureau said on Sunday the deal with Hezbollah would not be completed this week. An internal cabinet meeting has been set for Wednesday, but a deal with Hezbollah will not be on the agenda. "Even if a vote is taken this week, it will take a few more weeks until the deal is complete," the source said.

A government source close to talks with Hezbollah said Israel is still demanding clear information on the soldiers' condition before a swap can be approved. If they are dead, a possibility based on the soldiers' injuries at the time of the abduction, Israel would be releasing live terrorists - reportedly Hezbollah operatives captured in the Second Lebanon War and terrorist Samir Kuntar - for dead bodies.

A government source said most of the ministers supported the deal even if the soldiers are not alive.