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  Sharon and Peres were to meet later Sunday, Israel Army Radio reported.

Sharon needs the alliance with Labor to forge ahead with a withdrawal from Gaza and four West Bank settlements by the end of 2005. He lost his majority in parliament earlier this summer, with coalition hard-liners quitting in protest.

Peres confirmed Sunday that negotiators from Labor and Sharon's Likud Party have reached agreement on the terms of the Gaza pullback and on general policy toward the Palestinians. Sharon's aides were not available for comment.

Peres said his main demands were adopted, including introducing a more detailed timetable for a Gaza withdrawal.

Peres also said Sharon was no longer adamant about not coordinating the withdrawal with the Palestinians. "They (Sharon's negotiators) agreed to see if they can find an effective Palestinian partner," Peres told the Italian newspaper Il Secolo.

Sharon has refused to discuss the pullout with the Palestinians, saying the Palestinian Authority is tainted by terrorism and thus not an acceptable partner. However, Sharon has used Egypt as a go-between.

Peres said economic issues still need to be resolved.

In the partial agreement, Likud and Labor affirm that they will work toward a two-state solution to the Israeli-Palestinian conflict and will try to implement the U.S.-backed "road map." That peace plan originally envisioned a Palestinian state by 2005, but U.S. officials have since said the deadline is no longer realistic.

The two sides also agreed to accelerate compensation payments for settlers, with payouts to begin as early as next week, according to a copy of the document published in the Israeli newspaper Yediot Ahronot. Such payments could induce more settlers to leave voluntarily and weaken what is expected to be considerable settler resistance that might delay or even sabotage a withdrawal.

The document also said illegal West Bank settlement outposts would be dismantled immediately, in line with Israel's obligations under the road map. The Sharon government has only removed a handful of outposts so far, angering the United States. Sharon has cited legal difficulties, though his government has also funneled money to the enclaves for construction, roads and electricity.

Sharon and Peres, members of Israel's founding generation, were coalition partners in Sharon's first term. Their pragmatism enabled them to overcome vast political differences; Sharon until recently was a champion of settlement expansion, while Peres oversaw interim peace accords with the Palestinians.

Labor legislators said Sunday that disagreements over economic policy are serious enough to keep Labor out of the government.

Labor opposes Likud's efforts to privatize state-owned companies and planned cuts in spending on education and welfare. Labor wants Sharon to delay a Cabinet vote on the proposed 2005 budget until the party joins the coalition, a demand the prime minister has refused to meet.

Labor lawmaker Ofir Pines-Paz told Israel Army Radio that "we will not sit in a government in which piggish capitalism is running rampant."

The Palestinian daily Al Quds, meanwhile, quoted Palestinian leader Yasser Arafat as saying he would like to hold presidential and parliamentary elections but that Israeli restrictions on Palestinian movement made that impossible.

The newspaper also quoted Arafat as saying that former Gaza security chief Mohammed Dahlan, seen as a potential political challenger, would be free to put forward his candidacy when presidential elections are eventually held.

"But he called me a few days ago, telling me that he supports me," Arafat said.

In the West Bank, Palestinian police deployed in larger numbers Sunday but remained unarmed as they await Israel's final permission to carry weapons. Ala Hosni, police chief in the West Bank, said this was the first stage in a plan to restore order. He refused to say what further steps the police would take.

Israel banned Palestinian police from carrying arms in 2001, shortly after the outbreak of the current round of violence. Israel has accused Palestinian police of being heavily involved in the fighting.

Last week, Israeli Defense Minister Shaul Mofaz said police would again be able to carry arms, a decision meant to help restore order in the increasingly gang-ruled Palestinian streets. However, final arrangements are still being worked out.

© 2004 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.

Editor's note: