Sharon will submit a release list of prisoners for ministerial approval next week before a meeting with his Palestinian counterpart Mahmoud Abbas, according to Israeli dailies Yediot Aharonot and Haaretz.
Haaretz said between 40 and 60 Hamas and Islamic Jihad members who have not been implicated in anti-Israeli attacks would be added to a group of 400 detainees that the government agreed to release earlier this month.
Ministers had previously ruled out the release of members of Hamas or Islamic Jihad who have carried out bombings in Israel since the start of the Intifada in September 2000.
The release of the Hamas and Islamic Jihad members is being seen as a goodwill gesture to reinforce the public standing of Abbas.
The Palestinian PM has come under increasing fire from fellow Palestinians over his failure to persuade Israel to release more of the estimated 6,000 Palestinians in Israeli jails.
Hamas and Islamic Jihad announced on June 29 that they were halting their campaign of attacks on Israel for three months. But they attached a raft of conditions to the truce, including the release of all Palestinian prisoners.
The announcement comes ahead of a meeting between Israeli PM Ariel Sharon and Abbas on Sunday.
Al Jazeera’s Palestine correspondent says the meeting will concentrate on the release of detainees, Israeli blockades in the West Bank and Gaza, and the West Bank security wall.
Both leaders will then go onto meet President Bush in Washington in the next 10 days.
Hamas and Islamic Jihad have criticised Abbas for agreeing to the meeting while Palestinian president Yasir Arafat was still confined to his Ramallah headquarters.
Islamic Jihad spokesman Mohammed al-Hindi said the unelected Palestinian prime minister should avoid any pledges of funds as "an unacceptable bribe to stop the intifada".
"He is going to listen to people like (US National Security Adviser) Condoleezza Rice (Secretary of State) Colin Powell and George Bush who will demand the dismantling of the Palestinian organisations and the confiscation of weapons".
Meanwhile, Israel's army demolished overnight the West Bank homes of two Palestinians involved in last week's kidnapping of an Israeli taxi-driver, an army spokesman said on Friday.
The spokesman said the homes of Ahmed Hajaj and Ramaz Rimawi were demolished in Beit Rima for taking part in the July 11 kidnapping.
ISM members defiant despite
An Israeli commando unit rescued the 61-year-old taxi-driver unharmed from a house in Beitunia, near Ramallah. The kidnappers wanted to exchange him for 2,000 Palestinian prisoners, according to the army.
And in another development, Israel is to deport eight foreign peace activists deemed "a security threat" after they peacefully protested against the construction of a huge security fence around the West Bank.
The eight activists, who were all campaigning with the pro-Palestinian International Solidarity Movement, are likely to be flown back to their home countries within the next 24 hours.
Two are Swedes, two Britons and the other four from Canada, Denmark, France and the United States.
The move came after a Tel Aviv court on Thursday rejected an appeal filed by the activists' lawyer.
Threat to state security
At the hearing, the judge said the activists were disturbing construction of the security fence and had not stopped at an army checkpoint - actions which disturbed the peace and posed a danger to both state security and to themselves.
"The court proceedings were not even focused on why they were arrested, it focused on their affiliation with the ISM," the organisation’s spokeswoman Huwaida Arraf said.
"Every time the army cries 'security', nobody asks any more questions."
A group which champions non-violent direct action to protect civilians in the West Bank and Gaza Strip, the ISM was recently blacklisted by the Israeli authorities.
Since April 2002, nearly 60 ISM activists have been deported on "security-related" offences, said Arraf.
"We confront and challenge the illegal army policies in a non-violent manner, so whatever we do in the occupied territories is going to be seen as 'a security threat' because it always involves the army."
Israel began building the security fence in June 2002 in a bid to keep out Palestinian infiltrators.
The fence has angered many Palestinians, particularly as its construction has expropriated large tracts of land which they fear will end up as part of Israel in a future peace settlement.