The Israeli army started on Wednesday to remove some concrete barricades from the main checkpoint of the southern entrance of Jericho.
Israel said it would hand over security of the town but maintain control of the main highway that passes through it.
Political horse-trading and accusations against Israel for reneging on its agreements by refusing to dismantle its checkpoints in Jericho have marred an agreement between Palestinian and Israeli leaders reached in Egypt last month.
Transfer of five West Bank towns was one of the agreements that emerged from a summit in Egypt on 8 February between Palestinian Authority (PA) President Mahmud Abbas and Israeli Prime Minister Ariel Sharon that declared an end to more than four years of bloodshed.
A temporary ceasefire was negotiated in exchange for handing over security of the five towns to the PA.
Over the past few weeks, Israel had refused to dismantle its military roadblocks in and around the oasis town of Jericho and had refused to hand over the village of al-Awja, north of Jericho.
But Israeli security officials met with their Palestinian counterparts into the early hours of Wednesday morning to finalise the details of the revised transfer.
Speaking to Aljazeera from Ram Allah, chief Palestinian negotiator Saib Uraiqat said that both sides had agreed upon handing over of security responsibilities of Jericho to the PA.
"There has been agreement on gradually removing all checkpoints like the Diyuk barricade that links the town of al-Awja in northern Jericho.
"With regard to the town of al-Awja or Zone A, Palestinian security forces will be stationed there and Israel has pledged its forces would not invade the area again"
chief Palestinian negotiator
"And after four weeks a checkpoint at the southern entrance or what is called 'junction barricade or DCO' will be removed," Uraiqat said.
The roadblock is on the road that leads to Ram Allah.
Uraiqat also said: "With regard to the town of al-Awja or Zone A, Palestinian security forces will be stationed there and Israel has pledged its forces would not invade the area again."
The negotiator added that Israel has pledged not to conduct any more military operations in search of intifada activists, saying "they will be under the control of the Palestinian Authority".
Roadblocks to stay
Referring to Palestinian prisoners detained by Israel in Jericho, Uraiqat said: "The issue of freeing Ahmad Sadat, Fuad al-Shubaki and another four imprisoned in Jericho is a priority for the PA and has not been agreed upon yet."
According to the Israeli army, the new deal will see Israel maintain its roadblocks at the entrance to Jericho but remove another on a road linking the town to Ram Allah.
Tel Aviv also announced it would now hand over the village of al-Awja.
Israel will maintain its military
roadblocks on the main highway
The army said the handover of Jericho was set for Wednesday afternoon after Israeli forces and Palestinian security commanders in the area conduct a joint tour, but Palestinian security sources said on Wednesday that they had already been handed over parts of Jericho.
Israel also renewed its pledge to hand over the town of Tulkaram a few days after Jericho.
Israel radio said the Tulkaram transfer would take place on Sunday, to be followed by Qalqilya, just south of Tulkaram.
Towns still occupied
Israel said the seat of the Palestinian government in the town of Ram Allah and Bethlehem had not been agreed upon.
According to the 8 February summit, Israel had agreed to hand over five West Bank towns: Jericho, Tulkaram, Qalqilya, Bethlehem and Ram Allah.
But Israel now says no arrangements were made about Bethlehem and Ram Allah.
Palestinian resistance groups such as Hamas and Islamic Jihad have agreed to a cooling-off period but insist there cannot be peace if Israel continues its assassination campaign and its military incursions.
Israeli commitment questioned
Hamas spokesmen consistently have said that peace talks can begin only if Israel adheres to its promises and if there is a commitment from Israel to secure a truce.
Israel: No deal on Bethlehem and
Meanwhile in Cairo, Abbas was scheduled to continue talks with Palestinian groups on Wednesday in an attempt to get a formal peace agreement and a unified stance.
Hamas said it would not join the Palestinian government after parliament elections in July, despite a strong showing in recent municipal polls.
The growing political clout of Hamas has raised concerns that Israel might have to negotiate with the resistance movement in the future.
Muhammad Nazzal, a Hamas delegate in Cairo, said in a telephone interview: "Our goal is not to reach the [Palestinian] Authority or to take [control of] the authority because ... we think that the political framework of the Palestinian Authority is a framework that contradicts our policies."