Al Jazeera has learned that Sharia (Islamic law) may be introduced in both Swat Valley and Malakand district as part of the five-point peace agreement expected to be announced on Monday.
Sufi Muhammad said a five-member delegation of his group would meet NWFP's chief minister in the provincial capital Peshawar on Monday to finalise the deal.
The peace accord had reportedly been delayed for two months by Asif Ali Zardari, Pakistan's president.
"It was only after the nod from the president to the provincial government that this dramatic development did come about," Kamal Hyder, Al Jazeera's Pakistan correspondent, said.
Sufi Muhammad was released last year after spending almost eight years in jail for sending his men to fight in Afghanistan during the 2001 US-led invasion.
The religious leader has been holding a peaceful protest for months outside his native village in Dir, where negotiations have so far taken place.
Swat Valley itself has been in turmoil since 2007 with conservative groups fighting government troops to press for Sharia.
Hundreds of thousands of people have been left homeless after months of violence in the region.
Much of the violence has been blamed on the group led by Fazlullah, who is the son-in-law of Sufi Muhammad.
Muslim Khan, a spokesman for Fazlullah's group, Tehreek Taliban Swat, told Al Jazeera that as a gesture of good will, they had released a Chinese engineer held captive for more than five months.
Long Xiaowei, the telecommunications engineer, was taken to Peshawar after he was released in Barikot town earlier on Sunday, officials said.
The Chinese embassy in Islamabad confirmed that Long had arrived at the mission and would soon travel back to China.