UK energy company BG Group is set to seal a $4 billion (£2 billion) deal which would see Palestinian natural gas supplied to Israel, a report claims.
The Times newspaper reports negotiations are tentatively heading towards an agreement which analysts say would prove of major historical significance for the divided region.
Under the terms of the 15-year contract the Palestinians would receive revenues totalling $1 billion (£0.51 billion) while the Israelis would secure ten per cent of their total energy needs.
"We are making progress," BG Group's regional vice president, Nigel Shaw, said.
"There are commercial issues to be completed and we also require bilateral agreement between the two governments to get this project across the line. But this is a chance for greater economic prosperity in Palestine and that is only good for peace."
Previous Israeli and Palestinian governments have opposed the project on political grounds. The Times claims UK prime minister Tony Blair intervened to persuade BG Group, the former owner of British Gas, not to pass the deal elsewhere, reflecting the difficulties of creating agreement in the region's unstable political climate.
Observers warn the contract may yet collapse under the weight of current tensions. Internal fighting within Gaza has destabilised the territory while Israel's recent use of airstrikes to protect itself against rocket attacks has angered many.