JERUSALEM, Feb 14 (Reuters) - Israel’s cabinet on Sunday approved the release of 500 Palestinian prisoners in what Prime Minister Ariel Sharon called a goodwill gesture to bolster new Palestinian leader Mahmoud Abbas and build mutual trust.

In further support of a ceasefire declared by Sharon and Abbas at a Feb. 8 summit in Egypt, Israel allowed more than 200 labourers enter from Gaza for the first time in months, and pledged to give Palestinians the remains of 15 militants.

Abbas won a pledge from Islamic militants on Saturday to observe a de facto truce while they consider the ceasefire. In a major policy shift, the Hamas and Islamic Jihad groups said they would not retaliate immediately for any Israeli military action.

Government officials said the 500 prisoners could go free as early as Wednesday. Another 400 are due to be released in the next few weeks under a decision announced by Sharon last week.

"This is not an easy step, but this gesture possibly could help the Palestinian Authority solidify its rule and boost trust between the two sides," Sharon told ministers, a statement said.

Freedom for 8,000 Palestinians in Israeli jails is a highly emotive issue for Palestinians, who regard them as heroes of an uprising that began more than four years ago.

"We are insisting that all prisoners must return to their families. The issue is sensitive and humanitarian," Abbas told a news conference in the Gaza Strip.

Israel, which objects to releasing inmates convicted of attacks that caused bloodshed, has agreed to name a joint committee with the Palestinians to discuss expanding the list.

But an official said Israel would not free the jailed son of Marwan Barghouthi, the grassroots Fatah leader serving five life terms over the killing of Israelis.

"He has blood on his hands," the official said of Qassam Barghouthi, jailed since 2003 over what Israel had described as his membership in a "terrorist group".

An Israeli government official said of the 500 prisoners scheduled for release, around half belonged to Abbas’s Fatah faction and the others were members of Islamic militant groups.

PULLBACK FROM JERICHO

Israeli and Palestinian officers were to meet on Sunday to coordinate Israel’s plan to withdraw troops from the West Bank city of Jericho this week, and to pull back from four other cities at a later date, security sources and officials said.

"We are ready for this withdrawal which I believe will begin gradually in the next few days," Abbas said.

He and other Palestinian officials said they expected the pullbacks to be deep enough to allow free passage between cities, which the Israeli army has encircled and often raided in search of militants, and surrounding villages.

Mohammed Dahlan, an Abbas adviser who met on Saturday with Israeli Defence Minister Shaul Mofaz, said that in return for a commitment by wanted militants to abide by a truce, Israel would "stop assassinations and cease chasing them".

Israel, meanwhile, added to its package of goodwill gestures with a decision to give Palestinians the bodies of 15 gunmen killed in fighting last year, in a handover to take place at the Erez crossing in Gaza on Monday, security sources said.

In Gaza, which Israel plans to quit this summer, about 210 Palestinian labourers were allowed into the Jewish state through the Erez Crossing, officials said.

Jobs in Israel were once a lifeline for Palestinians in impoverished Gaza before violence erupted in 2000 and Israeli authorities barred them on security grounds.

"The suffering has doubled as there has been no work in the Gaza Strip," said one worker who made his way to Erez.

Some 1,000 workers and 500 merchants have been given permission to cross into Israel and a further 500 labourers could work at the Erez joint industrial zone, the army said.