However, Israeli officials insisted the Palestinian parliament speaker, Abdel Aziz Duaik, was let go because his three-year sentence was nearly at an end and that his release was not related to a swap involving the Israeli soldier, Sgt. Gilad Schalit. The officials spoke on condition of anonymity because no steps had been taken.

Since Hamas-allied militants in Gaza captured Schalit in June 2006, Egypt has been trying to arrange an Israel-Hamas swap that would bring his release. The negotiations have been accompanied by frequent reports that a deal was close, only to be followed by new setbacks.

Israel has expressed willingness to free hundreds of Hamas prisoners, but has balked at releasing several senior Hamas militants serving lengthy terms for attacks that killed and wounded Israelis.
Earlier this week, Israeli Defense Minister Ehud Barak met with Egyptian President Hosni Mubarak in Cairo, as a new Israeli negotiating team was being put together.

On Tuesday, a Palestinian news agency reported that the soldier was about to be transferred to Egypt as part of a deal.

Israeli officials denied it, and Ronni Daniel, a well-connected military affairs analyst for Israel’s Channel 2 TV, said it was “totally fabricated.”

Asked about the report during a visit to Rome, Israeli Prime Minister Benjamin Netanyahu said: “I have no such information. As of this time no such report has reached me.”

In Gaza, Hamas officials dismissed the report.

Palestinians and Israelis demonstrated on both sides of the Gaza-Israel border on Tuesday, demanding a prisoner swap.

After Schalit was captured, Israel rounded up more than 30 Hamas lawmakers, including the speaker, Duaik. The plan at the time was to trade the legislators for the soldier, but indirect talks have foundered.
In the meantime, Duaik’s 36-month sentence is near an end, and a military judge ordered his release.
Shopkeepers rushed over to greet Duaik after he crossed into the West Bank, passing out sweets to celebrate his release.

“My body is free, but my soul is still in jail with the other prisoners,” said Duaik.
Duaik is in his early 60s and suffers from high blood pressure and diabetes. His lawyer, Fadi Kawasmi, said inmates’ terms routinely are shortened by several months for good behavior.

Adding to the charged atmosphere, Egyptian forces were seen operating near the Gaza-Egypt border. But officials said they were carrying out a routine exercise.

Israel and Hamas do not deal with each other directly. Hamas does not accept a Jewish state in the Middle East.

Israel, along with the U.S. and European Union, label Hamas a terrorist group for sending dozens of suicide bombers into Israel, killing hundreds.

Egypt has mediated contacts between the two, but no agreement has been reached. Proposals talk of trading hundreds of Palestinian prisoners — possibly more than 1,000 — for the captured soldier. The prisoner release would probably take place in stages, and the soldier would be transferred to Egypt during the process.

While no contacts are known to be in progress, both sides have indicated they want the impasse to be resolved.

Duaik’s Palestinian parliament has not functioned since Hamas seized control of Gaza in June 2007, in effect creating a two-headed Palestinian government with Palestinian President Mahmoud Abbas ruling the West Bank.

Hamas’ archrival, the West Bank Palestinian government led by Abbas, coolly received Duaik, dispatching its relatively unknown minister for prisoner affairs to greet the freed speaker.

Another minor furor surfaced Tuesday after Israeli Public Security Minister Yitzhak Aharonovitz visited the hotly contested holy site in the Old City of Jerusalem where the Al Aqsa Mosque compound was built over the ruins of the biblical Jewish temples. Denunciations came from Palestinian officials and the Arab League.

A 2000 visit by Ariel Sharon, then the Israeli opposition leader and later prime minister, helped trigger a bloody Palestinian uprising. Palestinians demand total control over the site in a peace accord.

Meanwhile, an Israeli group said the government has formulated plans to legalize 60 existing homes at an unauthorized settlement outpost in the West Bank and allow the construction of 240 other residences.
Such a move would flout a U.S. demand for a settlement freeze.

The plans were approved by Barak and filed with authorities in April, according to Bimkom, a private Israeli group that specializes in planning issues.

The Defense Ministry confirmed that 60 housing units already completed would be legalized retroactively but denied that approval was given for the other 240.