The plan is to release the prisoners, held since before the 1993 Oslo Accords, in four stages, Ynetnews.com reported Monday.
Israeli Prime Minister Binyamin Netanyahu plans to bring the prisoner release proposal before the Cabinet for a vote, the report said.
"We are waiting. Returning back to direct negotiations depends on conditions we asked the American side to agree on, he said. "If they agree, we will go to the next step, which is preliminary negotiations in Washington to discuss the rules and the terms of direct negotiations."
The Oslo Accords required areas in the West Bank and the Jordan Valley to be divided three ways: areas under total Palestinian control, those where Israel maintains security control and the Palestinians municipal control and a third under total Israeli control.
The Israeli Cabinet will vote on the prisoner release soon as a goodwill act for renewing negotiations with the Palestinians, Haaretz said.
The Israeli Army supports the move, believing it will strengthen Palestinian President Mahmoud Abbas, who is facing sharp criticism over his decision to return to the negotiating table, the newspaper said.
The vote is likely to take place Sunday before the Israeli and Palestinian teams meet in Washington for the resumption of talks, observers said.
The prisoner release will take place in four stages, with the first at the beginning of the second month of negotiations and every two months after that, Ynetnews.com said.
Martin Indyk, director of the Washington-based Brookings Institution's Foreign Policy Program who served twice as the U.S. ambassador in Israel, was appointed to represent the United States in talks with the Israeli and Palestinian delegations, The Times of Israel reported.