About 85% of the Palestinian inmates belong to Abbas's Fatah faction.
The prisoner release will begin on Friday, according to an Israeli government spokesperson.
Mr Olmert had pledged to free the inmates in a bid to support Abbas's new government against Hamas Islamists.
But the Prime Minister said he will not release those with 'blood on their hands'.
Mixed reaction to Mid-East conference plan
US President George W Bush's call for an international conference to relaunch the Middle East peace process has been greeted with scepticism on both sides of the Israeli-Palestinian divide.
The plan was welcomed by Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas, but rejected by Hamas, further widening the Palestinian rift.
Hamas remains in control of Gaza after the Islamists' bloody takeover of the region last month, while Mr Abbas' Fatah faction retains its power base in the West Bank.
In a speech aimed at bolstering Fatah and undercutting Hamas, Mr Bush yesterday called for the conference to try and kick-start peace talks between Israelis and Palestinians that have been stalled for more than six years.
He said the conference would be chaired by the US Secretary of State, Condoleezza Rice, and that attendance will be limited to Israel, the Palestinians and states that back the creation of a Palestinian state, reject violence and recognise Israel.
Mr Bush also claimed that support for Hamas would be a victory for the group's 'foreign sponsors' in Syria and Iran and 'would crush the possibility of a Palestinian state'.
Despite welcoming the idea of talks, Israel has ruled out negotiations over the boundaries of any future Palestinian state.
While President Abbas has indicated that he is prepared to start final status talks, a spokesperson for Mr Olmert said he would be unwilling to discuss the core issues of borders, refugees and Jerusalem at this stage.
