"It will not by itself transform the future."
"There is a growing feeling among Israelis and Palestinians that the Annapolis summit is going to be little more than a photo opportunity"
Jacky Rowland, Al Jazeera's correspondent in Jerusalem
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Al Jazeera's Jacky Rowland said it was "another attempt at creating a positive atmosphere before Annapolis", on the same day in which the Israeli government agreed to release 450 Palestinian prisoners, and Ehud Olmert, Israel's prime minister, said the Jewish state would not build any new settlements in the occupied West Bank.
However, the number of prisoners to be released falls short of the 2,000 requested by Mahmoud Abbas, the Palestinian president, and represents only a fraction of the 10,000 believed to be held by Israel.
And Olmert's declaration on settlements stopped short of announcing a freeze on construction in existing communities on occupied lands, as demanded by the Palestinians.
The Israeli prime minister and Abbas held final talks late on Monday before the conference in Annapolis, Maryland, under US pressure to submit a joint statement addressing in general terms issues such as borders, and the future of Jerusalem and Palestinian refugees.
The leaders, however, failed to reach a breakthrough in their deadlock.
Following the talks, an Israeli official told reporters: "Both sides have made some progress ... but other issues still remain open."
Saeb Erakat, chief Palestinian negotiator, said: "There are differences, the meeting was difficult, the differences remain and the teams are convening again tonight."
A deepening deadlock could jeopardise the participation of already hesitant Arab countries in the conference.
High-level Arab attendance is seen as crucial to success of the Middle East peace conference. Arab League members will be briefed by Abbas in Cairo on Friday before deciding whether they will join the conference.
Olmert is to meet Hosni Mubarak, Egypt's president, on Tuesday in Cairo to lay out the Israeli position.
The US-sponsored conference comes at a time when both Abbas and Olmert are politically weakened.
Olmert is facing police investigations over alleged corruption, which he has denied, and the results of an official inquiry into his handling of the 2006 Lebanon war.
Fatah, led by Abbas, was driven out of the Gaza Strip in June by the rival Hamas movement.
Hamas, however, remains sidelined from the conference and the territory it controls has ground to a halt under the weight of international economic sanctions.
Israel also sealed Gaza's borders in June, barring most imports.
The project to shore up collapsing sewage infrastructure in Gaza was approved by Israel as a humanitarian project, the Israeli defence minister said, despite the Jewish state's declaration that the Palestinian territory is an "enemy entity".
Blair said some sewage would run in new pipes from January and by next June, 200,000 of Gaza's 1.5 million people would benefit. At least four people died last March when a sewage pond burst its banks in the north of the Gaza Strip.
Work would also now begin, Blair told a news conference, on creating industrial and commercial zones in the West Bank cities of Jericho and Hebron, largely funded by Japan and Turkey respectively, and improving tourist access and facilities at Bethlehem.
"It is a strong beginning for what is a critical part of this process, because without hope of prosperity and a rise in living standards and giving people an economic stake in the future ... then the politics will never succeed," said Blair, who represents the Quartet of powers engaged in mediating the Israeli-Palestinian conflict: the US, EU, UN and Russia.
Projects under discussion for the Palestinian territories include efforts to improve housing, education and recreational resources.