The meeting in Jerusalem is seen as a gesture of support for moderate Palestinian leader Mahmoud Abbas.

Israeli and Arab officials meanwhile said an Arab League delegation would go to Israel for the first time in its history. The 22-nation Arab League will send the delegation to Israel this week, with the mission of discussing a sweeping peace initiative as well as the threat posed by Hamas and other Islamic extremists.

The visit will focus on an Arab peace initiative and ways to help the beleaguered Palestinian Authority.

Israel rejected the Saudi-led peace plan when it was launched in 2002 but gave some aspects a cautious welcome when it was endorsed by Arab states earlier this year.

The Arab League historically has been hostile toward the Jewish state, but has grown increasingly conciliatory given the expanding influence of Islamic extremists in the region a concern underscored by Hamas' violent takeover of the Gaza Strip last month.

An Israeli statement issued after Livni's meeting with Fayyad said: "The discussion dealt primarily with the situation in the Palestinian Authority (PA) and the ways of improving the lives of the residents in the territories while preserving Israeli security interests."

Israeli spokeswoman Miri Eisen said her country saw the new Palestinian government as an opportunity. "This is a government which clearly has accepted the international principles - not only the recognition of Israel, but especially the renouncing of terrorism...

"So, for us, it's important to show not only our support for this government, but our capability to give to a moderate government, to show them that it's worthwhile to be moderates," she said.

An official in Fayyad's office said the meeting dealt with "broader political issues, not just removing a checkpoint here and there".

On Sunday, the Israeli cabinet approved plans for releasing 250 Palestinian prisoners.

The BBC's Bethany Bell in Jerusalem says the increased diplomacy is a sign of improving relations between Israel and the new Palestinian cabinet.

It comes three weeks after the Palestinian militant group Hamas seized control of the Gaza Strip, which split the Palestinian territories into two separately controlled entities.

PA President Mahmoud Abbas dissolved the elected Hamas-led government after the takeover and appointed Fayyad as prime minister in an emergency cabinet.

The US and Israel have offered strong support for Abbas - as has the Arab League.

The organisation is expected to send Egyptian Foreign Minister Ahmed Abul Gheit and his Jordanian counterpart Abd-al-Ilah al-Khatib to Israel.

"This is the first time the Arab League is coming to Israel," Israeli Foreign Ministry spokesman Mark Regev said.

"From its inception the Arab League has been hostile to Israel. It will be the first time we'll be flying the Arab League flag."

Meanwhile Israeli forces reportedly killed a member of the Palestinian militant group, Islamic Jihad, in the West Bank.

The man, Mahmud Nazal, was shot dead as he was driving his car near the town of Jenin, Palestinian hospital officials said.