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Israel will continue its efforts to negotiate a deal to free captive soldier Gilad Shalit, but will not cross the "red lines" it presented at this week's talks in Cairo, Prime Minister Ehud Olmert said in an address to the nation following Tueday's special cabinet session on the issue.

"Israel will not give in to Hamas' dictates as long as I am prime minister," Olmert said. "We will not cease our efforts, but we have red lines and will not cross them. We are not a defeated nation."

His associates said that if Hamas were to return to the understandings reached in earlier talks, it would be possible to resume the negotiations.

At the cabinet meeting, Ofer Dekel, Olmert's chief negotiator on Shalit, revealed for the first time what Israel had offered: the release of 325 Palestinian prisoners, including some who murdered Israelis. However, Israel insisted that 144 of the prisoners be sent to the Gaza Strip or abroad rather than returning home.

Shin Bet security service chief Yuval Diskin, who accompanied Dekel to Cairo, told the cabinet that Hamas refused to compromise on the release of some 100 additional prisoners who constitute the senior leadership of its military wing. It also refused to agree to the deportations.

"Had we agreed to Hamas' conditions as they insisted on the final day of the negotiations, it would have caused serious security damage to Israel," he said.

Israel Defense Forces Chief of Staff Gabi Ashkenazi and Military Intelligence director Amos Yadlin echoed this assessment. "Submitting to Hamas' demands would have dealt a mortal blow to moderate elements in the Palestinian Authority and the entire Middle East, while the extremists would have been greatly strengthened," Yadlin said.

The defense officials sharply criticized ministers who publicly advocated paying almost any price for Shalit's release.

Hamas had demanded that Israel release 450 prisoners it listed by name. Dekel told the cabinet that Israel repeatedly asked Hamas to submit an alternative list of prisoners, but it refused. During the weekend talks in Cairo, he added, it seemed that Hamas had agreed to Israel's demand that some of the prisoners be deported, and the organization also finally submitted new names to fill out the list. But it reverted to its original positions Monday, causing the Israeli team to go home empty-handed.

While Olmert pledged to continue the negotiations, the cabinet voted to set up a ministerial panel, headed by Justice Minister Daniel Friedmann, to examine ways of increasing the pressure on Hamas - mainly by making life harder for Hamas members jailed in Israel, such as by banning visitors. The panel will submit its recommendations on Sunday.

Olmert said that in addition to the Cairo talks, negotiations also took place via various secret channels. However, he declined to give the ministers details about these channels, due to their sensitivity and the fact that they might be needed in the future. In his speech to the nation, Olmert revealed that Israel also used private individuals as emissaries to Hamas.

Hamas rejects Israeli claims

In Cairo, a senior Hamas official, Osama Muzeini, said on Tueday that significant progress toward a deal had been made in the past few days. And the group's representative in Lebanon, Osama Hamdan, rejected Israeli claims that Hamas foiled the deal, insisting that the organization sought to complete it as quickly as possible.

Hamdan, interviewed by the satellite television station Al-Arabiya, said Hamas had agreed to various proposals made by the Egyptian mediators, who had thought they would be acceptable to Israel. However, he charged, the Israelis then hardened their stance and backtracked on issues that Hamas thought had already been settled.

"Israel had agreed to the number of prisoners to be released but not [specifically] to those on Hamas' list, and not to how they would be released," Hamdan said. "It opposed some of the names, thinking this could bear fruit in view of the pressure that would be created by Olmert's imminent departure from office."

The implication is that Israel tried to use the impending end of Olmert's term as a pressure tactic, since the new government is considered less likely to meet Hamas' demands.

Hamdan also complained that Israel wanted Shalit freed before it released the Palestinian prisoners.

Egyptian sources, in contrast, told Haaretz that both sides are equally to blame for the failure to close a deal.