Israeli Prime Minister Ariel Sharon and Palestinian President Mahmoud Abbas are meeting at the Egyptian resort of Sharm el-Sheikh in an attempt to end more than four years of bloodshed.
Mr Abbas and Mr Sharon smiled and shook hands at the start of the meeting before releasing details of a comprehensive ceasefire between the sides.
An invitation to both sides to meet separately with President Bush at the White House this spring added momentum on the summit's eve.
"Israel is willing to go very far and we're going to introduce today a package of confidence-building measures, incentives, to the Palestinians so that they could start this long journey on the road to peace," said Mr Raanan Gissin, a top Sharon adviser.
"But there's one thing that must be made very clear . . . there will be no flexibility whatsoever, no compromise whatsoever on fighting terrorism."
Mr Gissin said that as part of Israel's halting of military operations, it would stop its controversial targeted killing operations against wanted Palestinians, as long as the Palestinians kept militants under control.
Palestinian negotiator Mr Saeb Erekat called the summit a "beginning" and said talks might continue in Israel as soon as Wednesday. "We're determined to exert every possible effort to maintain this," he said.
In a dramatic break from longtime predecessor Yasser Arafat, the Palestinian President, Mr Mahmoud Abbas, announced an end to all militant attacks in the Israeli-occupied West Bank and Gaza Strip and in Israel.
The Israeli prime minister reciprocated by declaring an end to all military action against Palestinians.
Today's talks will be the highest-level meeting between both sides since Mr Sharon's visit to the Temple Mount in Jerusalem in 2000 helped spark the latest four-year long cycle of violence in which an estimated 4,000 people have died.
However, Islamic militant factions have so far agreed only to a conditional ceasefire, and neither side shows signs of budging on key obstacles such as borders and whether Palestinian refugees get the right to return to homes they abandoned or were forced to leave in what is now Israel.
Israel says it is ready to co-ordinate with Mr Abbas on its plan to withdraw settlers from occupied Gaza and part of the West Bank this year if violence stops and Palestinians rein in militants.
Palestinians fear Israel only aims to cement its hold on the West Bank, and are demanding the Jewish state abide by a commitment to freeze Jewish settlement growth in the territory.
US Secretary of State Condoleezza Rice, ending a Middle East visit, said the Gaza withdrawal was "a historic opportunity" for the Palestinians to regain lands they lost.
But Mr Abbas holds strongly to the Palestinian line that a state must include all the West Bank, including Arab East Jerusalem and Gaza, and that refugees forced to leave in 1948 should have the right to return their lands in what is now Israel.
Israel wants to keep major West Bank settlement blocs, sees East Jerusalem as part of its own "indivisible capital" and has ruled out the possibility of refugees returning to the Jewish state.