At the same time Prime Minister Sharon approved the release of 170 Palestinian prisoners in a move designed to bolster the new moderate PLO chairman Mahmoud Abbas and cement his own hold on power by finalising a new broad-based coalition.

“Our entry into government will guarantee the implementation of the withdrawal plan, now assured of having majority support in March when the evacuation of the first settlements from the Gaza Strip will be decided,” Giora Ayalon, a spokeswoman from the centre-left Labour party, said.

Representatives from Labour and the governing right-wing Likud applied the finishing touches to the coalition deal by agreeing the redistribution of several ministerial posts, the two parties said.

Prime Minister Sharon’s so-called disengagement plan, approved by parliament in October, envisages pulling out from all 21 settlements in the Gaza Strip and four other small Jewish enclaves in the northern West Bank.

Supported by both Likud and Labour, the plan will be fleshed out in March with the announcement of a clearer timetable to withdrawal.

At times stormy negotiations between Labour and Likud reached their climax with the position of Labour leader Shimon Peres, expected to be named deputy prime minister, the only remaining sticking point.

“The powers of Mr Peres will be determined by the prime minister just after the formation of the government,” said Likud negotiator Yoram Raved, who spoke of a few “technical problems”.

The coalition deal and PLO prisoner release announcement comes as British Prime Minister Tony Blair, heads to the region on the first visit by a foreign leader since the death of Yasser Arafat last month.

Mr Blair is widely reported to be planning a major international conference in London early next year to push the peace process forward.

During a lightning two-day visit, the British Prime Minister is due to meet in Israel with Prime Minister Ariel Sharon and Foreign Minister Silvan Shalom, and in the West Bank with Palestine Liberation Organization chief Mahmud Abbas and Prime Minister Ahmed Qorei.

“Blair will given a warm welcome in Israel because we consider him a genuine friend,” a senior foreign ministry official.