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Israel has lifted its opposition to a deal with Hezbollah involving the release of Palestinian prisoners in exchange for signs of life from captured soldiers Eldad Regev and Ehud Goldwasser, a source in the defense establishment recently told Haaretz.

This source and other officials told Haaretz that indirect negotiations for the release of the two Israel Defense Forces soldiers that the Shi'ite organization abducted in July 2006 did not bog down after the assassination of Hezbollah senior official Imad Mughniyah last month in Damascus. Hezbollah has announced since then that it regarded Israel responsible for Mughniyah's death.

On Friday, Hezbollah deputy secretary general Naim Qassem again accused Israel of culpability for Mughniyah's assassination in a speech to mark the birthday of the Prophet Mohammed. "We have clear proof, 100 percent, that cannot be doubted, that Israel is the head of the assassination," said Qassem.

Today, Hezbollah is scheduled to hold a formal service to commemorate 40 days since Mughniyah's death to be attended by the organization's leader, Hassan Nasrallah, who is expected to make a speech at the service.

The talks regarding Regev and Goldwasser, these sources said, are conducted by a German secret service official under United Nations auspices, but are yielding little progress.

Negotiations with Hamas for the release of Gilad Shalit, another IDF soldier captured in 2006, are not progressing, the sources added, citing internal differences within Hamas.

So far, Israel has said that it was categorically opposed to Hezbollah's demand to include Palestinian prisoners in any deal.

Official assessments allege that the two soldiers were "severely wounded" during the attack that ended with their abduction and the slaying of three other IDF troops. The official working assumption, however, is that the two soldiers are alive.

Hezbollah is refusing to release any sign of life from the two soldiers, preconditioning such a move on the release of Palestinian prisoners. Both sides are reportedly exchanging ideas for the deal, but the transaction is allegedly stuck because of intransigence on the part of Hezbollah's men vis-a-vis the demand to release Palestinians from Israeli prisons.

Turning to the negotiations for Shalit's release, the sources said the talks are being held up by exiled Hamas leader Khaled Meshal. They said Israel has for the past 30 days been expecting to receive a list of prisoners whose release the organization said it is seeking.

Until earlier this month, the proposed agreement with Hamas for Shalit's release was supposed to contain three main phases. During the first, Shalit was to be transferred to Egyptian custody, after which Israel was supposed to release 100 so-called "prominent prisoners," a group of Palestinian legislators from Hamas, as well as minors and women imprisoned in Israel.

In the second phase, Shalit was to be handed over to Israel and, at the same time, 350 Hamas prisoners were to be freed from prison. During the third part, which had no exact timeframe, Israel was to release 500 additional prisoners. But the exact makeup of the list of prisoners whose release Hamas is demanding is, in the opinion of Israeli experts, the subject of an internal conflict within the organization.

The two sides in the conflict are reportedly Meshal and the exiled leadership in Syria on one hand, and the internal leadership within the Strip, headed by Ahmed Jabri from the organization's military wing, Iz al-Din al-Qassam. Talks with Hamas over the exchange are also conducted indirectly, through the mediation of Egyptian Intelligence Minister Omar Suleiman. Representing the Israeli side is Ofer Dekel.

Yoav Stern contributed to this report.