Israel freed another 26 veteran Palestinian prisoners on Wednesday, alongside US-brokered peace talks.
But shortly after they walked free in a gesture meant to ease the talks' progress, Israeli army radio reported government plans to boost settlement in annexed east Jerusalem.
A group of 21 prisoners from the West Bank left Ofer prison, near Jerusalem, shortly after 1:00 am (2300 GMT) and the other five crossed moments later into the Gaza strip, correspondents at both sites said.
The West Bankers left Ofer in two minibuses with blacked-out windows and drove the short distance to the Beitunia crossing into the West Bank where they were greeted with cheers and fireworks.
They then drove to nearby Ramallah where they were welcomed at an official ceremony headed by Palestinian president Mahmud Abbas, who said that talks would not bear fruit unless all of approximately 5,000 Palestinians held by Israel go free.
"There will be no agreement if so much as one Palestinian prisoner remains behind bars," Abbas told thousands of cheering Palestinians gathered outside his headquarters in the West Bank city.
Speaking before the army radio's report Abbas reiterated the Palestinians' denial that the prisoner release was part of an agreement to allow Israel more settlement building.
"There are some living among us who say that we have a deal (to release prisoners) in exchange for settlement building, and I say to them, be silent."
Last week, an Israeli official said new tenders were to be announced in the large settlement blocs and in east Jerusalem "in the coming months" as part of "understandings" reached with both the Palestinians and Washington.
Wednesday morning's radio report said that Israeli Prime Minister Benjamin Netanyahu and Interior Minister Gideon Saar had agreed to build 1,500 new homes in the east Jerusalem settlement of Ramat Shlomo.
The five freed Gazans were met by hundreds of relatives and well-wishers as they entered the strip through the Erez crossing from Israel.
All 26 prisoners were convicted for killing Israelis, with most of the attacks occurring before the 1993 Oslo Accords, which granted the Palestinians limited self-rule but failed to usher in an independent state.
Netanyahu agreed to release 104 prisoners in stages as part of the resumption of talks in late July, after a three-year hiatus. A first tranche of 26 was freed on August 13.
Israel announced plans for more than 2,000 new settler homes in tandem with the August prisoner release, enraging the Palestinians.
The talks are held under a US-imposed media blackout but a senior Palestinian official said Tuesday that Israel had adopted hardline positions and negotiations had so far produced "no tangible progress".
"The current Israeli negotiating position is the worst in more than 20 years," Yasser Abed Rabbo, a top official with the Palestine Liberation Organisation, said in a statement.
"They want security first, and that the borders of the state of Palestine should be set out according to Israeli security needs that never end, and that will undermine the possibility of establishing a sovereign Palestinian state."
Although Israel is engaged in direct peace talks with the Palestinians the prisoners' release has sparked tensions within Netanyahu's coalition.
"The decision to release the prisoners is one of the most difficult I've had to make," Netanyahu told his right-wing Likud party on Monday.
"It is unjust because these terrorists are being released before completing their sentence. My heart is with the families of the victims."
Defence Minister Moshe Yaalon echoed those sentiments on Tuesday.
"In recent months we have been facing sensitive diplomatic circumstances and weighty strategic considerations which require us to take difficult and painful steps," his office quoted him as saying.
"It is not a black and white situation. It is highly complex and obliges us to be prudent and responsible, to see also the long view. This is a hard day," he said.
Nineteen of the 26 freed Wednesday are members of the Fatah party led by Abbas, three are members of the militant Islamic Hamas, and four are from the leftwing Popular Front for the Liberation of Palestine, according to a list released Sunday.