JERUSALEM, (AP) – Talks between Israel and Hamas over a crucial exchange of Palestinian prisoners for an Israeli soldier ended without agreement Monday after Hamas hardened its position and retracted earlier understandings, the Israeli government said.

The breakdown in the talks held in Cairo could have far-reaching consequences. Israel has said it will not ease its blockade of Gaza until the soldier, captured nearly three years ago by Gaza militants, is returned home. The blockade has impeded reconstruction in Gaza following Israel’s punishing January offensive there.

Outgoing Prime Minister Ehud Olmert said earlier that this was the last chance for an agreement before he leaves office. He is set to be replaced by Benjamin Netanyahu, who is putting together a hard-line government that is likely to be less receptive to Hamas demands. Netanyahu hopes to take office in the coming days.

The Israeli government statement announcing no deal had been reached with Hamas said Olmert would convene a special Cabinet session on Tuesday to give a “full report of the details of the results of the contacts,” language that strongly indicates the talks are over.

The Cabinet session was originally set to vote on a prisoner exchange deal, but officials said there would be no vote Tuesday because there is no agreement to consider.

The statement came after two high-level Israeli negotiators returned home following two days of intensive talks in Cairo. The envoys, Shin Bet security chief Yuval Diskin and Defense Ministry official Ofer Dekel, reported to Olmert after returning from the talks, which were mediated by Egypt because Israel and Hamas do not talk to each other.

The statement said that “during the negotiations, Hamas hardened its positions, retracted understandings reached during the last year and raised extreme demands, despite generous Israeli offers.”

Hamas officials in Gaza were not immediately available for comment, and no public statements were made in Cairo.

Hamas has demanded freedom for hundreds of militants in Israeli prisons in exchange for the soldier, whose case has become an emotional touchstone for Israelis.

Israeli defense officials said earlier Monday that there was progress in the talks, and a Hamas official agreed, while noting that there were still some outstanding differences over the list of prisoners to be freed. Israel insisted that Palestinians convicted of planning or carrying out deadly attacks on Israelis be deported to neighboring countries.

Israeli critics warned that freed militants could go on a killing spree, noting that dozens of Israelis have been killed in the past by militants released in such exchanges.

Winning the soldier’s release would have given Olmert a key diplomatic victory in his final days as prime minister. Schalit, 22, was captured by Hamas-allied militants in June 2006 in a cross-border raid from the Gaza Strip that killed two other soldiers. The abduction took place shortly after Olmert took office, and the case has clouded his tenure.

It was hoped that a prisoner exchange accord would set in motion speeded-up contacts toward a sustained truce between Israel and Hamas. Israel ended its bruising three-week offensive in Gaza in late January, aimed at halting Palestinian rocket fire from Gaza, with a unilateral announcement. Hamas did the same.

Since then, rocket fire has continued almost daily, though at a slower pace than before the offensive. Israel has retaliated by bombing tunnels used by Gaza militants to smuggle weapons and goods under the Egyptian border, as well as occasional airstrikes aimed at rocket squads.

The rocket fire and Israeli retaliation carry the risk of sudden escalation, making a long-term truce vital.

Also, world donors are ready to contribute billions of dollars for reconstruction in Gaza after the Israeli offensive, but Israel has said it will not ease its blockade to allow building materials to cross into Gaza until the soldier is freed.

Another sticking point is Hamas control of Gaza. The Islamic militants overran the territory in 2006, expelling the forces of Western-backed President Mahmoud Abbas of Fatah. The U.S., EU and Israel label Hamas a terror group, and donors are unwilling to funnel reconstruction funds through it.

A prisoner exchange and a long-term truce could have boosted Fatah-Hamas reconciliation talks, also in Cairo. The talks are reported to be deadlocked over several key issues.