The meeting will also tackle other regional issues such as the Iraq conflict that has divided Sunni and Shia Muslims across the region, and the ongoing political crisis in Lebanon between the Western-backed government and the opposition trying to topple it.
Arab leaders are also considering a proposal to forge closer military and security ties, as well as co-operation on developing nuclear energy.
It was not immediately clear whether the proposal drawn up by Egypt aims at establishing a formal military pact for the Arab League's 22 member-states.
The Egyptian proposal says the countries should set up a "new and effective pact for Arab national security".
Fears are high among Sunni leaders that any US-led attack on Iran, which has refused to comply with UN demands to halt atomic work, could further destabilise their region.
Ziad Abu Amr, the Palestinian foreign minister, said on Tuesday the time was right for Arab states and Israel to end their 60-year-old conflict.
He said: "The time is right to reach a settlement of the Arab-Israeli conflict.
"I think if the relevant parties are serious, we have a good plan that can achieve peace and security in the region for all."
Abu Amr was referring to the Arab peace plan first adopted in 2002.
Prince Saud al-Faisal, Saudi's foreign minister, said the initiative will have a strong chance of winning international support and of reviving Israeli-Arab peace talks if adopted unanimously by all Arab leaders at the March 28-29 summit.
Draft resolutions agreed on Monday are dominated by the Arab-Israeli conflict and appear designed to persuade Israel into talks without altering the text of the peace initiative.
The draft text obtained by Reuters calls on "all Israelis to accept the initiative and seize the current opportunity to return to direct and serious negotiating process at all levels".
Israel has objected to some parts of the plan, including the proposed return to the 1967 borders, the inclusion of Arab East Jerusalem in a Palestinian state, and demands for the return of Palestinian refugees to their homes in what is now Israel.
The text is also viewed with reservations by the Islamic Hamas movement now leading the Palestinian government.
Khaled Meshaal, the Hamas leader in exile, was quoted by Saudi media as urging Arab leaders before the Riyadh summit not to make concessions on the demand for the Palestinian refugees to return.
Hamas demands a right to return for all Palestinians who fled or were driven out of what is now Israel during the 1948 war.
It has refused to recognise Israel but Palestinian officials say it has agreed not to go against the peace plan.
The final draft avoids any mention of the phrase "right of return" for Palestinian refugees.
Instead, it calls for a just solution to the refugee problem.
It also sets up a mechanism to promote the peace plan that could pave the way for Arab countries with no ties to Israel to open channels of communications with Israel - a long-time goal of US administrations.
On Tuesday, Al Jazeera aired an interview with Muammar al-Gaddafi, the Libyan president, in which he criticised the participation of Arab leaders in the Riyadh summit.
He urged them not to attend the meeting on the grounds that "the US administration had identified in advance the resolutions of the summit".