Israel won't pay any price to free soldier

Officials familiar with the talks said Israel was intent on barring convicted killers from returning to homes in the occupied West Bank, which is close to Israeli cities, and that they might be sent instead to the Gaza Strip or foreign countries.

Hamas had accepted that some released prisoners would be exiled but wanted them to be able to choose their destinations, the officials said.

It was unclear whether Israel had dropped its opposition to freeing 20 senior militants whose release Hamas has demanded. Israel holds them responsible for the deaths of dozens of its citizens.

The German mediator came to the Gaza Strip to convey Israel's position to Hamas after Israeli Prime Minister Benjamin Netanyahu discussed a swap with ministers on Monday.

A deal would bring home Israeli soldier Gilad Shalit in return for some 1,000 of the 11,000 Palestinians held in Israeli jails.

TERSE STATEMENT

Shalit, now 23, has been held captive in the Gaza Strip since 2006. He was seized by militants who tunnelled into Israel from the territory.

Netanyahu's office issued a terse statement after Monday's late-night cabinet talks, saying only that the Israeli leader had instructed his negotiating team to continue efforts to free Shalit.For Netanyahu, a right-winger whose tough dealing with militants has been a centrepiece of his political career, the release of prisoners responsible for the deaths of Israelis poses a particular dilemma.

Netanyahu is also under pressure from the families of Israelis killed by militants, who oppose their release.

An exchange in the coming days would coincide with the first anniversary of an offensive launched by Israel in the Gaza Strip on December 27 last year. At least 1,400 Palestinians and 13 Israelis were killed in three weeks of conflict.

The United Nations and Western powers hope a swap will open the way to a relaxation of Israel's blockade of Gaza, where 1.5 million Palestinians are dependent on food aid and smuggled goods.

Netanyahu has given no indication he would ease the restrictions after a deal with Hamas, which has spurned Western demands to recognise Israel and renounce violence.

(Writing by Jeffrey Heller in Jerusalem; editing by Andrew Dobbie)