Prime Minister Ehud Olmert held a long meeting on the issue with Shin Bet Director Yuval Diskin before the cabinet meeting.
The prime minister is later expected to convene the narrow forum consisted by himself, Defense Minister Barak and Foreign Minister Tzipi Livni, as well as the heads of the defense establishment, in order to discuss the situation in Gaza and the Shalit issue.
The meeting will also be attended by Minister Rafi Eitan, representatives of the Israel Defense Forces, Shin Bet and Mossad security organizations, head of the Defense Ministry's Diplomatic-Security Bureau Amos Gilad, and the prime minister's diplomatic advisor, Shalom Turgeman.
According to security sources, at the first stage the agreement will include the reopening of the crossings and the release of Palestinian prisoners out of a list including 350 names, which has yet to be approved by a ministerial committee dealing with the issue. The committee's discussions are expected to be sped up this week.
The National Security Cabinet will make the final decision on the issue.
At the second stage, Shalit will be transferred to Egypt, and some 550 terrorists of "medium" rank would be released as a gesture to Egyptian President Hosni Mubarak.
At the third stage, after Shalit is returned to Israel, the crossings from Israel to Gaza will be fully opened and some 400 "light" prisoners will be freed – most of them women, elderly people and youths. In total, 1,200 to 1,400 Palestinian prisoners will be released as part of the deal.
What will happen in Rafah?
Olmert made it clear Saturday that Israel would not reopen the crossings as long as the Shalit issue is not resolved, and this message was reiterated by government ministers on Sunday.
Israel's additional demands include a commitment to halt the smuggling of weapons into the Gaza Strip and a complete ceasefire, which is not being implemented at the moment.
Another issue which has yet to be determined is the opening of the Rafah crossing, which is meant to change the security-geographical reality in the region and put Egypt in charge of the situation in the Strip. It is unclear whether the Egyptians are willing to take this responsibility at this stage.
In addition, despite the talks between Hamas and Fatah, it is unclear whether Palestinian President Mahmoud Abbas' men will be allowed to be present at the border crossing, as determined in an agreement signed in 2005. The Europeans have already expressed their willingness to resume the presence of their monitors.
Senior defense officials estimated Sunday morning that the upcoming days may create a significant opportunity for the release of Gilad Shalit, who has been held captive by Hamas for almost 1,000 days now.
The same sources had made more reserved remarks on the issue in the past. They spoke on the backdrop of sensitive discussions being held by the political echelon on a long-term truce agreement in Gaza and a prisoner exchange deal with Hamas.
The estimates are based on an analysis of Hamas' situation in the Gaza Strip following Operation Cast Lead, which according to the sources, created a significant drive for advancing the deal.
"Not everything seen on the surface reflects what is happening inside the Strip," a senior security official told Ynet. "There is no doubt that in the current state of affairs, both sides will eventually be able to reach a diplomatic decision."
According to the source, Hamas suffered a heavy blow in the recent operation in Gaza, is with its back against the wall, and has a clear interest to reach a comprehensive lull agreement – which would include the reopening of the crossings – in order to rehabilitate itself.
Another reason is the Palestinian organization's fear of a new Israeli government which would change the rules of the game and all the agreements made in principle so far.
Dispute: How to respond to violations?
Meanwhile, security sources say that in spite of the rockets fired by Hamas in recent days, the organization is acting cautiously and is not expanding its activity, so as to prevent a significant Israeli response.
Defense establishment officials are at odds over the Israel Defense Forces' response to any firing of rockets or violation of the ceasefire obtained after Operation Cast Lead.
Some officials are pushing for a firmer response, but most agree that Hamas is acting in a limited manner in order to show that it is "alive and kicking" in terms of its terror activity, but not beyond that.
And what about the arms smuggling tunnels from Egypt to Gaza. The Israel Air Force attacked several tunnels on the Philadelphi route in the Rafah area over the weekend, but defense officials admit that the smuggling is ongoing these days as well, although in a limited manner.
Despite the Egyptians and Europeans' desire to operate against this phenomenon, this is not translated into effective actions at the moment.
According to estimates, the international activity will reduce the phenomenon in the coming months, not only at the top of the pyramid – by damaging the tunnels' route – but also through a more comprehensive in-depth treatment.
Simultaneously, terror organizations will attempt to continue the smuggling activity in any way and will even try to upgrade it.
Hanan Greenberg contributed to this report