Israel and the Palestinians were moving toward agreement on new security arrangements for Gaza's border with Egypt, officials from both sides said Saturday, a deal that could allow Palestinian residents of the coastal strip relatively free movement for the first time.

The signs of progress came days before Israeli Prime Minister Ariel Sharon and Palestinian leader Mahmoud Abbas were to meet for the first time since Israel's withdrawal from the Gaza Strip.

Also Saturday, the Palestinians broke ground on their first major development project in Gaza since the withdrawal a $100 million complex that will provide housing for 25,000 people. The development, funded by the United Arab Emirates, was being built on the former Jewish settlement of Morag and was expected to take two years to complete.

A border deal would mark a significant breakthrough. Before complet-

ing its withdrawal last month, Israel closed the Rafah border terminal, Gaza's main gateway to the outside world. The Palestinians say reopening the border is vital for Gaza's devastated economy.

A deal to reopen the terminal will have to address the security concerns of Israel, which fears militants and weapons will reach Gaza more easily without the Israeli inspectors who once operated Rafah.

This concern was underscored in the days following the Israeli withdrawal. Border control broke down and thousands of Palestinians crossed freely in and out of Egypt without any security checks. With few exceptions, Palestinians have been barred from traveling to Egypt since order was restored.

Israeli Foreign Minister Silvan Shalom also said Saturday that Egypt is not doing enough to stop the flow of weapons into Gaza and that anti-tank rockets and shoulder-held missiles have reached the area.