The two leaders met at Olmert's residence in Jerusalem late Saturday, kissing and warmly shaking hands after a two-hour dinner followed by one-on-one talks.

"The two leaders expressed their will to cooperate, as true partners, in an effort to advance the peace process" and reiterated support for reaching "a solution of two states living side by side in peace and security," Olmert's office said in a statement late Saturday.

The two leaders' long-awaited encounter -- their first since an informal meeting in Jordan in late June -- sparked hope that the peace process could be nudged from the slumber in which it has been for the past six years.

"Our intention is to begin ongoing negotiations in order to advance the peace process that we want so much," Olmert said Sunday before going into a weekly cabinet meeting.

"The ice has been broken," Deputy Prime Minister Shimon Peres said. The meeting "again opened the way to negotiations... there will certainly be more such meetings in the future."

But while Israeli officials played up the importance of the encounter, observers on both sides said it lacked in concrete measures and warned against inflated expectations.

"It was a first step, but we won't know if it's important before we see the results on the ground," Ali al-Jarbawi, a political science professor at the Birzeit University in Ramallah, told AFP. "The Palestinian people are looking for results, not meetings."

"It was a bit more than a photo op," said Udi Segal, a journalist with Channel Two television, adding that the encounter was "a meeting between two leaders with their backs against the wall."

Among the measures agreed during the encounter, Israel agreed to release up to 100 million dollars in customs duties that it has been withholding from the Palestinian Authority since the Islamist Hamas movement formed a cabinet in March.

The Israeli cabinet voted unanimously to release the money during its weekly meeting on Sunday.

Hamas is considered a terrorist organization by Israel and the West, which froze all direct aid to the Palestinian government after it took power.

Observers said that the meeting was meant to strengthen Abbas at a time when he is facing off against Hamas in an intense power struggle, which boiled over into deadly armed clashes last week between rival Palestinian factions after the Palestinian president called for early elections.

Olmert said Sunday that he agreed to release the money "in order to help in humanitarian aid to the Palestinian people who suffer among other things due to the failing conduct of their government which is not part of the international community."

But Israel did not agree to release prisoners -- an important gesture sought by Abbas.

"Olmert did not give Abu Mazen anything real," said Khani al-Masri, an analyst in Ramallah.

Wrote the Israeli newspaper Maariv: "The biggest achievement of Abu Mazen yesterday at the prime minister's residence in Jerusalem lay in the Palestinian flag that was raised in his honour above the entrance."

"He received a lot of promises and a little money... The only asset that Abu Mazen can broadcast to his people today is a little optimism."

Hamas likewise said the encounter did not amount to anything concrete.

"Israel has previously given many promises, both to this president and the previous one. They always quickly backtrack on their promises and try to forget the main point, which is the occupation and the aggression," the Hamas government said in a statement Sunday in Gaza.

And the radical Islamic Jihad group said it was a waste of time.

"This kind of meeting is wasting time... and is not helping the Palestinian interests," it said in a statement. "The time that went into planning this meeting could have been used to solve many internal problems."