Prime Minister Ehud Olmert's decision came despite a personal request from Palestinian Authority Chairman Mahmoud Abbas during the meeting last week. Olmert had suggested such a release could happen, even before
militants in Gaza free Shalit.
Israel makes it a practice before the Muslim Eid al-Adha holiday, which begins Saturday, to free prisoners in a goodwill gesture toward the Palestinians.
The sources said that Olmert did not have sufficient support in his cabinet for the move ahead of the holiday and had also faced criticism from Shalit's family.
"It does not look as though there will be anything before Shalit is out," said one political source.
An official in the Prime Minister's Office said no decision had been taken yet on when prisoners might be freed.
The defense establishment announced that it would be easing some restrictions on Palestinians in light of the holiday. Israeli Arabs will be permitted to enter the Gaza Strip and Zone A of the West Bank to visit relatives. In addition, 4,000 Palestinians will be permitted to leave the West Bank to visit family members withint the Green Line.
Palestinian chief negotiator Saeb Erekat called the decision not to release prisoners "unfortunate" adding that it showed Olmert apparently was unwilling to risk the wrath of Israeli public opinion by releasing Palestinian prisoners without assuring Hamas-linked militants would free Shalit, who was captured in a June 25 cross-border raid.
Erekat also said that the decision would hurt Abbas' standing.
Israel holds at least 8,000 Palestinians in its jails. The prisoners have an iconic status in Palestinian society.
"I think that a gesture that in normal times is accepted at holiday time must not happen today because it would be misinterpreted," Minister Zeev Boim told Israel Radio.
Meanwhilw, a Palestinian newspaper published a letter from Shalit's mother and father on Friday.
"We are looking forward to seeing you released soon," they said, adding that they hoped the factions would allow him to read the letter. "The fact that we do not know anything about you is really hard."