The majority of the Israeli government accepted on Sunday the US-backed 'road map' to peace in the Middle East, setting in train steps which may lead to the establishment of a Palestinian state by 2005.
Prime Minister Ariel Sharon's cabinet voted 12 to seven in favour of endorsing the move. Four abstained.
It is expected that the reformist Palestinian Prime Minister Mahmoud Abbas will meet his Israeli counterpart on Monday to charter the next step forward for the road map.
US president George W. Bush, instrumental in the unfolding of the peace plan, may meet Sharon and Abbas in Europe or Egypt in the next two weeks, according to officials in Washington.
Part of the first phase of the peace plan is the removal of Israeli soldiers from sensitive Palestinian zones. Settlement activity will be frozen in the West Bank and Gaza.
Palestinians, for their part, will need to end militant activity, alleged to have carried out attacks against Israelis.
But there could still be several flare-up points between parties.
Palestinian politicians demand that refugees have the 'right of return' to parts of Israel disposed during the 1948-49 Middle East war.
However, Sharon's cabinet voted 16-1 against allowing the return of Palestinian refugees.
Foreign Minister Silvan Shalom said: 'Israel will never agree to the return of Palestinian refugees to the territory of the state of Israel.
'That would be the end of the state of Israel, and I think here there is practically complete consensus among all citizens of the state.'
The Bush administration said the cabinet decision was 'an important step forward' as this was the first time an Israeli government formally agreed to the creation of a Palestinian state.