Prime Minister Ariel Sharon's cabinet gave its approval in principle last week. His office said the prisoners would be released in days.
Israel had said that it would not free prisoners with "blood on their hands" - those it says had been jailed for planning or carrying out attacks that killed Israelis.
Israel Radio said 120 of the prisoners to be freed were from the dominant Fatah movement. The others were caught inside Israel illegally.
It said the Shin Beth domestic security service had ruled out the release of a further 30 Islamist prisoners whose names had originally been proposed.
On 7 December, Israel released six Egyptian students from prison as part of a deal which includes freedom for Israeli businessman and convicted spy Azzam Azzam, Egyptian security sources said.
Azzam got a hero's welcome
from Israel's Druze community
The students, arrested in August and charged with conspiring to kill Israeli soldiers, were handed over on 5 December at the Egyptian consulate in Tel Aviv and arrived in Cairo later.
Azzam is an Israeli Druze businessman who was found guilty of spying in 1997 and was imprisoned for 15 years.
Azzam crossed into Israel from Egypt's Sinai peninsula at the Taba checkpoint near the Israeli Red Sea resort of Eilat. "He was very excited and screamed 'I am born again'," a witness said.
Israel agreed to release the students when Egyptian Foreign Minister Ahmad Abu al-Ghait and intelligence chief Umar Sulayman visited Israel in late November, the official Egyptian newspaper al-Ahram said.