Shalit was abducted by Gaza militants in a cross-border raid in June 2006. Hamas has demanded the release of hundreds of Palestinian prisoners in exchange for the soldier's freedom.
Hamas on Wednesday accused Israel of trying to torpedo a cease-fire agreement between them with last minute demands. "Hamas vehemently rejects Israel's conditions," said a statement issued by the Islamist organization, which rules the Gaza Strip.
Hamas spokesman Fawzi Barhoum said "there is no link between the two issues. Israel is being hard-headed and is piling up hindrances and erecting obstacles in the path of the Egyptian [mediation] efforts," Army Radio reported.
Earlier Wednesday, Prime Minister Ehud Olmert's security cabinet agreed after meeting for more than four hours that "it would be inconceivable" for Israel to accept an Egyptian-proposed cease-fire calling for reopening border crossings to more than limited humanitarian aid without Shalit's release," Interior Minister Meir Sheetrit told Israel Radio.
The cabinet convened an emergency session to discuss a possible prisoner exchange with Hamas which could see hundreds of Palestinian prisoners released in exchange for Shalit.
"The crossings are open and will remain open to humanitarian aid," said Olmert's spokesman, Mark Regev. But, he said, Israel has decided that "any further widening will be dependent first on the release of Gilad Shalit."
Regev said the security cabinet discussed the number of prisoners Israel would be willing to swap for Shalit, but he declined to disclose any of the figures or names.
"The ministers understand full well the sort of price that releasing Gilad Shalit will require and I believe they are
supportive," he said, adding that Amos Gilad, an Israeli envoy, was expected to return to Cairo shortly to continue the talks.
Regev said prior to the meeting that the cabinet was also expected to reach a decision on the terms of a long-term truce in Gaza after Israel's 22-day offensive there last month.
The Campaign for the Release of Gilad Shalit responded to the cabinet's announcement by saying they were satisfied by the intentions, but still waiting to see the final outcome of the decision.
"The declaration released by the government cabinet meeting, was merely that - a declaration. We, as the campaign of friends supporting Gilad Shalit, are satisfied by the declaration made by the government of Israel led by Ehud Olmert, which has yet to secure the release of Gilad," they said in a statement.
"After two-and-a-half years of declarations, time has come for action. The Israeli government is obliged to take advantage of the opportunity created after Operation Cast Lead, to return Gilad Shalit to his family. We would like to emphasize that there may not be another opportunity, and there won't remain anyone to rescue."
On Tuesday, Olmert reiterated that Shalit must be freed as the top priority of any truce deal with the Hamas rulers of the Gaza Strip.
"We will negotiate his release first, and only then will we be willing to discuss things like the Gaza crossings and rebuilding the [Gaza] Strip," Olmert said Tuesday during a tour of Jerusalem. Israel and Egypt clamped a blockade on Gaza after Hamas overran the crowded coastal territory in 2007, allowing in only humanitarian supplies.
In Damascus, exiled Hamas leader Khaled Meshal accused Israel of adding in a new condition at the last minute in an attempt to thwart Egyptian efforts to reach a truce.
"There can be no truce unless the [Gaza] blockade is lifted and the crossings are opened. The truce issue should not be linked to the issue of prisoner Shalit," Meshal told reporters in Damascus after meeting with Arab League Secretary-General Amr Moussa.
Olmert indicated that negotiations might take weeks. His term will end soon, when a new prime minister takes over. "Even if Shalit's case cannot be resolved while I am in office, the foundations we built will facilitate his release," he said.
Hamas wants hundreds of Palestinian prisoners released in exchange for Shalit. Some prisoners were convicted of participating in or planning some of the bloodiest Palestinian terror attacks against Israel.
Israel has had a policy of not freeing prisoners directly involved in deadly attacks, but the principle has been eroded in recent years.