Dagan also sounded out Egyptian officials about the consequences of an army withdrawal from Israel's border with Egypt within the larger framework of the settlement pullout, the paper said.
It said Israel wanted guarantees Egypt would prevent weapon smuggling from its territory into the Gaza Strip.
Israel's Defence Minister Shaul Mofaz suggested on Wednesday Israel kept control of the Strip's border with Egypt at Rafah to prevent arms being smuggled into the Palestinian territory, particularly through tunnels.
Since the Palestinian uprising broke out in late September 2000, the army has blown up hundreds of houses in Rafah in an attempt to destroy the tunnels.
The hawkish Israeli premier told parliament's foreign affairs
and defence committee on Monday he had not decided whether troops would be maintained in the southern Gaza Strip.
"On one hand, this strip is supposed to prevent arms smuggling, but on the other it's a cursed route that has caused, and will continue to cause, daily conflict," he said.
"There are various opinions, and in any event I intend to discuss this with the Egyptians."
Sharon announced in early February his intention to dismantle 17 of 21 settlements in the Gaza Strip. The move, that could begin within weeks, is part of a larger plan of unilateral disengagement from the Palestinians.
The prime minister said last December he would act unilaterally towards resolving parts of the Middle East crisis as he accused the Palestinians of failing to fulfill their obligations under the US-backed road map for peace.
The announcement was criticised by the international community, including its staunchest ally, the United States, which would prefer to see a negotiated solution to Israel's conflict with the Palestinians.