JERUSALEM – Responding to an ultimatum issued earlier today by Palestinian terrorist groups holding an abducted Israeli soldier hostage, Prime Minister Ehud Olmert’s office publicly rejected any possibility of agreeing to a prisoner-exchange deal, stating Israel does not negotiate with terrorists.

The three militant groups behind the kidnapping of 19-year old French-Israeli citizen Gilad Shalit said they were giving Israel until 6 a.m. Jerusalem time tomorrow to agree to release 1,000 Palestinian prisoners or “pay the consequences.”

But WorldNetDaily has learned Israeli diplomatic officials working with the defense establishment have drawn up a tentative agreement for possible communication to Hamas that includes the release of Palestinian prisoners in exchange for the freeing of Shalit, kidnapped in a well-orchestrated attack June 25.

After Olmert received the ultimatum, issued by Hamas, the Popular Resistance Committees terror organization in Gaza and a new group calling itself the Army of Islam, the Israeli leader’s office put out a statement claiming it will “not give in to blackmail by the Palestinian Authority and Hamas, led by murderous terror organizations.

“We will hold no negotiations over the release of prisoners,” the statement said. “The Palestinian Authority bears full responsibility for Gilad Shalit’s well-being and for his safe and healthy return to Israel.”

Israeli diplomatic sources, however, told WND an agreement in the works for possible offer to the terrorist groups states if Shalit is freed, the Jewish state would release an unspecified number of Palestinian prisoners who were not convicted of violence.

The sources said the agreement was being drawn up as a draft at the request of Olmert and Defense Minister Amir Peretz for possible approval at a security meeting to be held later today.

According to the draft agreement, Israel would free a number prisoners including some of those being held in administrative detention under Israel’s Prevention of Terrorism Ordinance, which allows security forces to arrest militants it accuses of planning terror activities. This would clear the way for the release of more than 60 Hamas members arrested last week in Judea, Samaria and Jerusalem, including senior legislatures in the Hamas-led Palestinian government.

The draft agreement also states Israel would conduct a phased withdrawal of ground troops currently stationed in the southern Gaza Strip and that Israel would limit operations in Gaza only to foiling terror attacks.

In exchange, Hamas would have to free Shalit and must also agree to the cessation by all Palestinian terror groups of Qassam rocket-firings from Gaza into nearby Jewish communities.

Since Israel’s withdrawal from Gaza 10 months ago, more than 1,000 rockets have been fired from the territory aimed at nearby Jewish communities. For the past month, an average of 30 rockets per week have been fired at the Israeli town of Sderot, located about three miles from Gaza.

The terror groups had warned in a statement today that if Israel does not respond to their ultimatum they will consider Shalit’s abduction a “closed case.” They did not elaborate further.

In the attack in which Shalit was kidnapped, Palestinian terrorists used a half-mile tunnel they dug to infiltrate behind the Kerem Shalom military station, which is on the Israeli side of the Israel-Gaza border.

Soldiers at the border usually monitor the Gaza Strip and not the Israeli side, where the tunnel exit was located.

Upon exiting the tunnel, the Palestinian terrorists split into three cells, one lobbing more than 20 anti-tank missiles at an army tank; another attacking the tank with grenades, killing the two Israeli soldiers and kidnapping Shalit. The third cell attacked an army lookout post.

Two terrorists were killed during the raid, while the others escaped into Gaza with the kidnapped soldier. The army was not aware one of its troops had been kidnapped until several minutes after the operation.

Defense leaders here called the Kerem Shalom attack a “stunning” operation. They said the operation went well beyond the scope of sophistication evidenced in recent Palestinian terror attacks. It was the first kidnapping of an Israeli soldier by Palestinian terrorists since 1994.

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