ERUSALEM, July 6 — After much debate and a close vote, Israel's Cabinet agreed today to release 300 or more Palestinian prisoners in the coming days. The move addressed, but fell far short of meeting a key Palestinian demand in the Middle East peace negotiations.

Even as Prime Minister Ariel Sharon's ministers were thrashing out the issue in Jerusalem, both Israelis and Palestinians were protesting in the streets on a scorching summer day.

Outside the prime minister's office, Israelis who lost family members in terror attacks held up posters of those killed and demanded that Mr. Sharon's government keep closed the jail cells of Palestinians convicted of violence. Aware of the sensitivities, Mr. Sharon told his Cabinet, "There is no way prisoners with blood on their hands will be released," according to an official at the meeting.

In Gaza City, Palestinians marched and raised placards of some of the roughly 5,500 prisoners seized by Israel in the current round of fighting that began in September 2000. The Palestinians are insisting that all be released if peace talks are to progress.

Elsewhere in Gaza City, Palestinian government workers began whitewashing graffiti that praises Palestinian militants. The elaborate, brightly colored paintings cover many of the city's walls, and Israel has demanded the Palestinian Authority act to halt incitement against Israel.

In another development, Shaul Mofaz, Israel's defense minister, said talks with the Palestinian security chief, Muhammad Dahlan, were "very positive" and that the number of Palestinian attacks were down recently.

The Palestinians are demanding additional Israeli troop withdrawals from West Bank towns, to follow up on last week's pullout from Bethlehem and much of the Gaza Strip.

"We are ready to continue to hand over other cities," Mr. Mofaz said. "It will be done gradually."

The prisoner issue is a highly emotional one on both sides and could improve the climate for negotiations if increasing numbers of prisoners are allowed to go home, and the level of violence remains low.

Palestinian Prime Minister Mahmoud Abbas has made the releases a top priority, and it is one of the quickest and most tangible ways he can demonstrate to Palestinians that he is winning concessions in talks with Israel. Mr. Abbas has met with Mr. Sharon four times in recent weeks, and another session is expected this week.

"We have an interest in seeing that the new Palestinian government is strong," Avraham Poraz, the interior minister in Israel, said following the Cabinet meeting. "Those being released now are not murderers. We have to look to the future, and if we want less killing, and less terrorism, we will have to be flexible on this issue."

However, Palestinians are demanding freedom for all Palestinian prisoners, while Mr. Sharon's government appears willing to release them by the hundreds if relative calm prevails, but not by the thousands.

"The Israeli government should not make these decisions unilaterally," said Qadoura Fares, a Palestinian legislator and president of the Palestinian Prisoners' Club, which assists those jailed. "What we are demanding is a joint Palestinian-Israeli committee that negotiates the criteria and approves the names of those to be released."

After an initial debate today on releasing prisoners, the Cabinet voted 10 to 10, with 2 abstentions. At that point, some ministers proposed a monitoring committee to review the releases and whether the Palestinians were working to halt violence.

The ministers then passed the measure by 13 to 9, according to an official who briefed reporters.

The government did not give precise figures, but Mr. Poraz said he expected the releases to total about 300 over the next two weeks. The Israeli media said the number could reach 350.

Israel has freed about 300 prisoners in the past few weeks.

Israel placed numerous conditions for the releases. Most of those to be freed are being held under "administrative detention," which allows suspects to be held for renewable six-month stretches without charges being filed.

Women, prisoners under age 18 and over age 60 will also be given priority.

Prisoners belonging to Hamas and Islamic Jihad, extremist groups that oppose negotiations with Israel, will not be freed.

Hamas, Islamic Jihad and the mainstream Fatah movement have all agreed to a truce that was declared a week ago, and a smaller Palestinian faction, the Popular Resistance Committees signed on today.

The group claimed responsibility for firing rockets at a Jewish settlement in the Gaza Strip on Wednesday. Since then, the Palestinian security forces have arrested nine members of the Resistance Committees. In response to the truce declaration, two were released today and the other seven were expected to be freed soon, said Muhammad al-Baba, a spokesman for the group.

Mr. Abbas, widely known as Abu Mazen, is extremely reluctant to send Palestinian security forces to confront militants. But he says he will not tolerate violations of the truce.

Israel is insisting that he go much further, and arrest and disarm the factions that have carried out attacks, even if they have temporarily suspended them.

The past week has seen a number of mostly small-scale clashes in the West Bank and the Gaza.

No Israeli has been killed since the truce was declared June 29, though Palestinian gunmen shot dead a Bulgarian worker on a West Bank road who was apparently mistaken for an Israeli.

Three armed Palestinians have been killed over the past week, including one who apparently blew himself up in Gaza and two who were shot in confrontations with Israeli security forces in the West Bank.

The 5,500 Palestinian prisoners detained in the current Palestinian uprising include about 2,000 convicted and sentenced by Israeli courts. Almost 2,700 are at some stage of the judicial process, while 800 are being held without charge, according to Btselem, an Israeli human rights group.

The release of Palestinian prisoners is just one of many demands placed on both sides under the Mideast peace plan, known as the road map. It was formally launched a month ago and seeks to create a full-fledged Palestinian state and a comprehensive peace agreement within three years.