Israel has indicated that it is ready to release many jailed Palestinians in return for a soldier seized by militants in June.
In a major policy speech, the Israeli Prime Minister Ehud Olmert offered to ease travel restrictions on Palestinians and free up frozen funds if violence against Israel ended.
He repeated his readiness to give up some occupied land for an eventual peace agreement.
Within hours of Mr Olmert's address, the Al-Aqsa Martyrs' Brigades fired rockets into the Israeli border town of Sderot, despite a ceasefire declared on Sunday.
No one was injured.
The rocket attack followed the killing of two Palestinians in an Israeli raid in the West Bank, where a truce is not in effect.
