ISRAEL and Egypt signed a three-way trade deal with the United States yesterday in a move that signalled a further warming of relations between the two neighbours and gave momentum to renewed hopes for peace negotiations in the Middle East.

The pact will enable Cairo to export some goods free of duty to the US. It was hailed as the most important agreement to be reached by Israel and Egypt since they signed their peace deal 25 years ago.

Under the agreement seven Qualified Industrial Zones will be set up in Cairo, Alexandria and Port Said, where goods produced using Israeli input can be sold to the US.

The agreement could create as many as 250,000 jobs in Egypt’s textile sector — the country’s largest area of export — next year, and help to offset the ending next month of beneficial US quotas on the import of textiles. Beyond the trade deal Egypt and Israel believe that the agreement could pave the way for greater co-operation in the search for peace. Israel appears more willing to accept Cairo’s help in its planned disengagement from Gaza next year after Yassir Arafat’s death last month.

There are hints that Cairo may return its ambassador to Tel Aviv and of the possibility of a meeting between Ariel Sharon, the Israeli Prime Minister, Hosni Mubarak, the Egyptian President, and the new Palestinian leader after the January 9 elections.

“This is good business for all of us and it will also be one more important ingredient to change the atmosphere in the Middle East,” Ehud Olmert, the Israeli Trade and Industry Minister, said.

Israel, which has a free-trade agreement with the US, would benefit from the low cost of labour in Egypt, making production by Israeli firms more competitive.

In recent weeks Cairo has released Azzam Azzam, an Israeli Druze accused of spying, after talks between Mr Sharon and Mr Mubarak. In turn Israel has released six Egyptian students and has sanctioned the freeing of up to 200 Palestinian prisoners. The trade agreement is viewed as another step in the process. It takes advantage of the US promotion of the industrial zones, which will help Israel to break out of its economic isolation in the region. Supporters of the zones point to an Israeli agreement with Jordan that helped to boost Amman’s trade with America from just $13 million (£7.2 million) to $800 million, creating 40,000 jobs.

Mr Olmert said that the agreement could increase Israeli exports by $150 million annually, but Israel also hopes that it will increase contact between Egyptians and Israelis as Egyptians travel to Israel in search of business partners.

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