The Egyptian official news agency, MENA, quoted high-level sources as saying the move has the backing of both the United States and the European Union and the steps include a ceasefire, a key Israeli demand.
"High-level sources confirmed an important understanding, reaching the point of an agreement in principle, has been completed between Egypt, Israel, the Palestinians and several active international parties, America and Europe, regarding a comprehensive settlement to the Israeli- Palestinian struggle," the agency said.
The Palestinian side is said to have committed to check operations against Israeli targets and Jerusalem in turn would put a halt to all military actions as long as the Palestinian commitment held.
Attacks on Israel to continue: Hamas
As per the report, Prime Minister Ariel Sharon does not find it necessary to sign a ceasefire agreement until the security and administrative capabilities of the Palestinian Authority are rebuilt gradually.
The understanding could lead to a "comprehensive solution to the Israeli-Palestinian conflict," MENA said.
Israeli officials have termed the report "a little premature," but said it would respond positively if militants ceased attacks.
"There are a few correct elements but it's a little premature to say there's an agreement," a senior official in Prime Minister Ariel Sharon's office told Haaretz.
"We will respond positively if on the other side there will be arrangements for a ceasefire, a cessation of hostilities. However, it should be understood that whatever arrangement is reached, this is not a substitute for fulfilling the obligations the Palestinians have taken upon themselves under the road map."
The region is better off now: Israel
Palestinian officials said that the Palestinian Authority and militants were close to an understanding on a ceasefire, but more talks were needed, it reported.
Egypt hasn't officially commented on the report.
Relations between Israel and Egypt have been warming up recently with Cairo releasing alleged Israeli spy, Azzam Azzam, and reports that it might also return its ambassador to the Jewish state as "the new spirit in relations opens the door for his return."
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