The new summit was called before US President George W. Bush pledged $350 million in aid to the Palestinians to bolster security and economic development and said the goal of Palestinian statehood "is within reach."
As part of a confidence-building package to be presented at the summit, Israel will carry out a phased military pullback from positions around five Palestinian cities in the West Bank and free 900 prisoners, cabinet officials said.
Prime Minister Ariel Sharon and top cabinet ministers approved the steps at a 4-1/2 hour meeting in Tel Aviv.
Palestinians jailed for deadly attacks will not be included in the release, the officials said, adding that a first batch of 500 prisoners would be freed next week, after the summit, with 400 to follow over a period of three months.
The release of some 8,000 prisoners held by Israel is key to attempts by new Palestinian President Mahmoud Abbas to consolidate power following the death of Yasser Arafat, end bloodshed and revive a US-backed peace "road map".
Next week, after the summit, troops will move away from the West Bank city of Jericho then carry out withdrawals, over two-week intervals, from areas around Tulkarm, Bethlehem, Qalqilya and Ramallah, the officials said.
In addition, a joint Israeli-Palestinian committee will be formed to finalise a roster of Palestinian militants who will be struck off Israel's most-wanted list in return for a halt of attacks against Israelis.
"We are not aware of figures nor the sentences of those who will be released," Abbas said after the measures were announced. "We hope that the first group will be huge and include prisoners who served long sentences."
Under the package, Israel will also open all the Gaza Strip border crossings it closed in response to strikes by militants.
"Israel has made clear to the Palestinians there can be no progress (towards peace) without a complete cessation of terrorist acts and violence and the dismantlement of terrorist infrastructure," Sharon's office said, announcing approval of the steps recommended by the Defence Ministry.
Abbas, citing a concern not to stir civil unrest, has said he wants to co-opt rather than crush militants, and Palestinian officials have demanded greater Israeli compliance with road map obligations including a halt to West Bank settlement expansion.
Khaled Meshaal, the exiled leader of Hamas, said Israel had adjusted its position on a truce Abbas has been seeking but not enough to satisfy the militant group. Israel insists it will not be party to a formal cease-fire but will meet calm with calm.
"I hope there will be an official declaration of an armistice, on the cessation of all acts of violence," Vice Premier Shimon Peres said on Army Radio.
Abbas, referring to a formal announcement, told reporters: "We hope to God this will happen."