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Hassan Nasrallah, the leader of the Lebanese-based guerilla group Hezbollah, said Tuesday there is positive progress in negotiations to return two Israel Defense Forces soldiers held by the group.

Nasrallah said the limited exchange Monday in which Israel traded a prisoner and the bodies of two Hezbollah guerrillas for the body of an Israeli who drowned at sea two years ago provided an important incentive for a major prisoner swap in the future.

Hezbollah's capture of IDF reservists Ehud Goldwasser and Eldad Regev in July 2006 sparked a 34-day war between the Lebanese guerrillas and Israel, leaving about 1,400 people dead.

"For the first time I can speak about hope, about optimism and about positive progress and about an opportunity to reach a great achievement and a full exchange," Nasrallah said on Hezbollah's Al-Manar television.

"There is positive progress in the main negotiations over the two soldiers and the prisoners... I assert that there are strenuous negotiations, continuing sessions which will be resumed in days," he said.

Hezbollah has repeatedly said it would only trade the two soldiers for the release of all Lebanese and Arabs detained in Israel. Israeli government officials declined to immediately comment Hezbollah's assertion, saying they would have to study the speech first.

In a statement on Al-Manar, Hezbollah also confirmed Monday that it had transferred information "related to issues of mutual interest, with the intention of achieving progress on them."

"Hezbollah hopes that this goodwill will produce long-awaited progress toward resolving the cases of all prisoners," the statement said.

The information is believed to be connected to Israel Air Force navigator Ron Arad, who disappeared after his plane went down over Lebanon in 1986. Haaretz learned Tuesday, however, that the information sheds no light on his fate.

PM: Enemies hiking cost in 'ugly trade' for MIAsPrime Minister Ehud Olmert, referring to the Monday swap, said Tuesday that Israel's enemies are engaged in an "ugly and cynical trade in feelings," demanding ever higher prices in exchange deals aimed at the return of missing and kidnapped IDF troops.

Olmert, speaking in Ashdod at a conference on aliyah issues, said that the swap was "balanced, and at a price which Israel was authorized to bear."

But he added that "For years, our enemies have been seeking to raise the price to be paid by Israel for scraps of information, abducted civilians and soldiers, or, heaven forbid, remains.

"This is an ugly and cynical trade in feelings, and in the feelings of Israeli society. At times there is no alternative but to pay the painful price."

The negotiations to secure the release of the two reservists are being conducted through United Nations-appointed German mediator Ernst Uhrlau. The major sticking point currently in the talks is Hezbollah's demand that Israel first release a large number of prisoners in exchange for information on the two, while Israel is insisting that the exchange be carried out in a single stage.

A statement released by the Prime Minister's Office said Monday confirmed that the latest swap was "an additional step in the framework of the negotiations to return abducted soldiers Eldad Regev and Ehud Goldwasser."

"Israel expects that this evening's significant step will serve to hasten the processes that have been underway for over a year," the statement said.

"As a goodwill gesture, there will be a swap of a prisoner and the bodies of two Hezbollah fighters for the remains of an Israeli who was not a soldier," the source said.

Israeli security sources also called the exchange a confidence-building measure, aimed at improving the atmosphere ahead or a future prisoner exchange with Lebanon.

Several IDF soldiers have been missing in Lebanon since the 1980s and are presumed dead. But there had been no previous report that an Israeli civilian was missing.

Meanwhile, German Attorney General Monika Harms said Tuesday that is standing behind its decision to free an imprisoned Iranian agent despite a plea from the family of missing Israel Defense Forces soldier Ron Arad to reconsider the terms of the release.

Hamas: Shalit deal more complicatedHamas spokesman Abu Obadiah said Tuesday that the deal for the release of IDF soldier Gilad Shalit, who was abducted last June by militants from Hamas and other Palestinian organizations, would be more complicated than the exchange deal Israel made with Hezbollah.

The spokesman told the Palestinian news agency Ramatan that Shalit's captors would not give up their demands to compromise with Israel. He also said to expect a deal which would embarrass Olmert and his cabinet.