Al Jazeera's Walid Batrawi said the Israeli Prison Authority confirmed releasing 300 prisoners, who were making their way to the West Bank checkpoint, Bitounia.
He said 108 more prisoners were expected to follow suit.
Batrawi quoted Israeli sources as saying that another 21 Palestinian inmates were freed on Monday and were being transported to the Erez crossing.
He said that in Bitounia an emotional reception awaited the prisoners, who were also expected to visit the tomb of Yasser Arafat, the late Palestinian president, in Ramallah.
Launching the first formal peace talks in seven years at the Middle East conference in the American city of Annapolis last week, Ehud Olmert, the Israeli prime minister, and Mahmoud Abbas, the Palestinian president, agreed to try to reach a deal on creating a Palestinian state by the end of next year.
But Olmert, weakened by scandals and political setbacks, told his cabinet on Sunday that he would not be bound by the Annapolis deadline.
"We will make an effort to hold speedy negotiations in the hope we may conclude by the end of 2008, but certainly there is no commitment for a firm timetable for their completion," Olmert said.
In an apparent hint to coalition partners that he was not planning concessions without a reciprocal move from the Palestinians, he said any progress on peace would depend on adhering to commitments under a stalled US peace "road map".
Olmert said: "The most important thing in the joint statement is that ... any agreement that we reach in the future will be dependent on completion of all road map commitments.
"In other words, Israel will not have to implement any commitment which emanates from the agreement before all the road map commitments have been met".
Olmert's comments came after the US withdrew a draft UN resolution endorsing action agreed to at Annapolis.
Although Israel apparently had no problems with the uncontroversial text, it said a resolution was inappropriate.
Analysts have suggested it was worried a formal resolution would get the UN too involved in Middle East conflict resolution efforts.
The 2003 US road map provides benchmarks that include a freeze of Jewish settlement activity in the West Bank, occupied by Israel since the 1967 Middle East war, as well as a Palestinian crackdown on armed groups.
Both sides accuse the other of not meeting those benchmarks.
On the ground, meanwhile, sporadic clashes continue. Three members of the military wing of Hamas were killed on Monday morning in an exchange of fire with Israeli troops at Beit Lahya in the north of the Gaza Strip, a Palestinian medical source said.
The three members of the Ezzedine al-Qassam Brigades were identified as Islam Abed Rabbo, 23, Aziz Fahri, 22, and Mohammed Abu Mehdi, 23.
|Israel reduced fuel supplies to Gaza last |
month, leaving petrol stations closed [AFP]
An Israeli military spokeswoman confirmed the incident.
The day before, Israeli artillery fire killed one Palestinian fighter and wounded five others in the Gaza Strip, Hamas said.
Hours earlier, three Israeli soldiers were injured by mortar fire.
Israel regularly launches raids into Gaza and said on Sunday it had stepped up attacks in the coastal strip in the past week.
A statement said Ehud Barak, the defence minister, had told ministers he had authorised more military action in Gaza, including the targeting of "manned military Hamas targets".
Barak said Israel had killed Palestinian 22 fighters in the past week.
Israel also reduced the amount of fuel allowed into the coastal strip last month.
The move - which Israel said was in response to the rocket attacks - has left most Gaza petrol stations closed and brought traffic almost to a halt.
Mahmoud al-Khuzundar, the chairman of the society of petrol company owners, said on Sunday that "cooking gas will run out within days and cars will stop within hours".