JERUSALEM (Reuters) - Israel decided Wednesday against lifting its border blockade of the Gaza Strip until Hamas agreed to the release of a captured Israeli soldier, putting a longer-term ceasefire proposal by Egypt on hold.

The unanimous decision by outgoing Prime Minister Ehud Olmert's security cabinet raised the stakes in delicate negotiations over Hamas demands that Israel free up to 1,400 Palestinian prisoners in exchange for the soldier, Gilad Shalit.

A security cabinet statement said Palestinian prisoners would have to be freed to get Shalit back and that a list of names would be prepared as soon as possible for government approval. It is unclear if Israel's list will match Hamas's.

Gaza's Hamas rulers have rejected linking Shalit to an Egyptian plan for an 18-month ceasefire, under which the enclave's border crossings would be opened to materials needed for reconstruction after Israel's 22-day military offensive.

The air, sea and land bombardment, which Israel launched with the declared aim of halting rocket attacks, killed more than 1,300 Palestinians, destroyed some 5,000 homes and damaged much of Gaza's infrastructure, local officials said.

The crossings are open and will remain open to humanitarian aid, said Olmert's spokesman, Mark Regev.

But he said Israel has decided that any further widening will be dependent first on the release of Gilad Shalit, captured by Gaza militants in a cross-border raid in 2006. Israel says reconstruction supplies like steel and cement can be used by Hamas to build more bunkers and rockets.

Regev said the security cabinet discussed the number of prisoners Israel would be willing to swap for Shalit, but he declined to disclose any of the figures or names.

The ministers understand full well the sort of price that releasing Gilad Shalit will require and I believe they are supportive, he said, adding that Amos Gilad, an Israeli envoy, was expected to return to Cairo shortly to continue the talks.


Hamas spokesman Fawzi Barhoum said Hamas had no objection to Shalit's release if Israel met the Islamist group's demands on Palestinian prisoners, but he would countenance no connection between Shalit and the proposed truce.

Israel has been reluctant to enter a ceasefire deal that would require it to keep Gaza's border crossings opening, arguing that doing so would only cement Hamas's hold on power.

Diplomats said an agreement would likely lead to the freeing of close to 1,000 of some 11,000 Palestinians in Israeli jails, short of the number demanded by Hamas.

But an Israeli official said even if Israel and Hamas agreed on a list of prisoners, they remained at odds over where they would be sent after the swap takes place.

We want them expelled out of the country but Hamas wants them to return to their homes, either in the Gaza Strip or the occupied West Bank, the official said, referring to prisoners Israel regards as the biggest security risks.

Palestinians view prisoners held by Israel as heroes of what they see as a battle against occupation. Israel has carried out lopsided exchanges in the past, trading large numbers of Arab prisoners for its captured troops or their bodies.

Olmert said Tuesday he hoped to win Shalit's freedom before he left office but a new government that will be formed after last week's election might have to tackle the task.

(Additional reporting by Allyn Fisher-Ilan, Ari Rabinovitch and Jeffrey Heller in Jerusalem and Nidal al-Mughrabi in Gaza, Writing by Jeffrey Heller and Adam Entous; Editing by Jon Boyle)