The green light for Rafah to function under Egyptian and Palestinian control, with European observers and Israeli camera surveillance, came on Tuesday as Palestinian ministers denied any final deal had been reached.
The fate of the terminal has been in limbo since before Israeli troops withdrew from Gaza in mid-September.
Israel has come under increasing international pressure to allow reopening of the crossing, the only access to the territory that bypasses the Jewish state.
However, Israel is still in negotiations with the European Union over what kind of presence the 25-nation bloc will adopt at Rafah, with no clear indication of when the border terminal will reopen.
After talks with Italian Foreign Minister Gianfranco Fini, Prime Minister Ariel Sharon said Israel wanted the European representatives to have "real powers" and not be limited to observer status.
Similar comments were made during the security cabinet debate, which stressed the importance of the European representatives having authority to enforce the agreement.
Israeli Foreign Minister Silvan Shalom, at a news conference with Fini, demanded that the EU representatives be given the authority to enforce the agreement and not simply be observers.
Sharon (L) met Italian Foreign
Minister Gianfranco Fini
"I don't want to go into specific details, but who is going to check the luggage of those who will get in and out? Still we are negotiating these specific issues with the European Union," Shalom said, without specifying when the crossing would reopen.
Asked whether Israel wanted EU soldiers sent to Rafah, a Foreign Ministry spokesman said the need was for a "presence that would beef up security".
Fini said the European Union would check Israel's demands about the level of authority to be accorded to the observers.
Israel's decision to allow European representatives at the crossing would be the first time for Europe to take on a significant role in the Israeli-Palestinian conflict.
Israel wants only VIPs and Palestinian citizens to cross at Rafah, with foreign nationals forced to pass through Israel, via a separate terminal at Kerem Shalom, a senior official said.
Deputy Prime Minister Shimon Peres, who said the Rafah question must be solved urgently otherwise Israel's withdrawal from Gaza would "not be complete", will lead the team negotiating with the Europeans.
Palestinian Planning Minister Hassen Khatib, who has been involved in coordinating the Gaza pullout with Israel, said the Israeli demands, including live transmission, were making an agreement impossible.
"I don't want to go into specific details, but who is going to check the luggage of those who will get in and out? Still we are negotiating these specific issues with the European Union"
Israeli foreign minister
"Until now, there has been no agreement. The crossing is still closed. It is difficult to be optimistic," he said in the West Bank town of Ram Allah.
He accused Israel of lacking the political will to reach an agreement because of its reluctance to start implementing the roadmap, an internationally drafted peace blueprint that has little progress since its launch in 2003.
A senior World Bank official welcomed the Israeli decision but said the clogged crossings from Gaza into Israel need to be streamlined urgently to give the crippled Gaza economy a chance to recover.
"It's a very big step, it's a significant new departure in Israeli policy, it's a major development," Nigel Roberts, the bank's director for the West Bank and Gaza Strip said.
Cargo trucks line up at the Karni
checkpoint in the Gaza Strip (file)
Though most attention is focused on the Rafah issue, Roberts said opening and expanding the capacity of the Karni crossing from Gaza into Israel is more urgent, because fresh Palestinian produce must be exported this month.
Roberts said agreement on the Rafah crossing is within reach.
"That's been very much the focus of attention for the past month, and there is hope that this could be wrapped up relatively quickly, even this week," he said.
A deal on the Rafah crossing would lessen the suffering of those Palestinian families who are today divided by the border, Roberts said. Also, it would give a badly needed political boost to Palestinian President Mahmoud Abbas as he heads into 25 January parliament elections.
Roberts said opening the bottleneck at the Karni goods terminal between Gaza and Israel is a must, and it needs to be done quickly as the Palestinian harvest approaches and perishable agricultural exports head for the crossing.
"What's really important in terms of economic stability and growth is the crossings with Israel, that's what matters the most," he said. "That's where virtually all the freight gets transacted at the moment, and this is why its so important that the Palestinians and the Israelis can wrap up a deal on this in the very near future."