Netanyahu says Hamas prisoner deal may not happen

JERUSALEM (Reuters) - An Israeli prisoner exchange with Hamas has not yet been agreed and may not happen, Prime Minister Benjamin Netanyahu said on Tuesday, after a senior cabinet colleague predicted a breakthrough within weeks.

"There is still no deal, and I do not know if there will be one," Netanyahu, whose reticence on the state of the Egyptian- and German-mediated negotiations has helped stoke speculation about imminent progress, told reporters.

Leaders of Hamas, the Islamist group ruling the Gaza Strip, were in Cairo to discuss the proposed swap of captive Israeli soldier Gilad Shalit for hundreds of jailed Palestinians.

Officials close to the talks said on Monday that Israel had dropped its objections to some 160 prisoners that Hamas wants included on the release roster.

But both sides have discouraged speculation that an exchange might be in place as soon as Friday's Muslim feast of Eid al-Adha.

Israel had long balked at granting amnesty to Palestinians jailed for attacks that killed its citizens. While signaling flexibility in its bid to recover Shalit, the Israeli government is wary of a domestic backlash over a deal that bolsters Hamas.

"Should there be such (a swap) we will not be sparing with a public discussion. We will not do it as a fait accompli. We will allow the cabinet ministers, and the public in general, to discuss the issue," Netanyahu said.

Seven top Israeli cabinet ministers have been discussing the proposed deal privately. One of them, Interior Minister Eli Yishai, went public on Tuesday in an apparent attempt to calm any Israeli concern at the asymmetrical swap.

DEAL IN WEEKS?

"God willing, it will be approved," Yishai, who heads the ultra-Orthodox Jewish party Shas, told Israel Radio. "All the ministers, without exception, think that everything must be done to bring him (Shalit) home."

"I very much hope that it will be finalised very soon, within not more than a few weeks," he added.

Shalit was seized by Hamas-led gunmen in a 2006 raid across the Gaza border, and Israel is determined to secure his release.

Prisoner releases are no less emotive for Palestinians, who see their nearly 11,000 jailed brethren as heroes of a struggle to found an independent state in Israeli-occupied land or -- in Hamas's case -- of an open-ended war against the Jewish state.

Hamas accused Israel of stirring up speculation about an imminent deal in a bid to generate Palestinian popular pressure on the Islamist movement to relax its terms and speed up a deal.

Some Israeli ministers have said that jailed Fatah activist Marwan Barghouti should be freed as part of any swap, arguing his release would help Palestinian President Mahmoud Abbas.

But Vice Premier Silvan Shalom said on Monday that Barghouti, jailed for life in 2004 for his role in attacks on Israelis, would not be included in the swap.

Netanyahu said on Monday that Israel awaited "clarification" of the latest Hamas demands. Hamas said on Tuesday that it was premature to expect imminent agreement and blamed Israel for any hold-ups.

"We in Hamas are continuing our efforts, through the parties involved in the swap file, to overcome the obstacles placed by the Israeli enemy," it said in a statement issued in Gaza.

Israel, having imposed stringent censorship on its own press reporting of the negotiations, has accused Hamas of deceptive media leaks. Hamas accelerated the talks last month by publishing a "proof of life" video of 23-year-old Shalit. (Additional reporting by Nidal al-Mughrabi in Gaza; editing by Tim Pearce)