Palestinian Authority President Mahmoud Abbas and Israeli PM Ehud Olmert have met in Jerusalem for a new round of talks - their third meeting in a month, reported BBC.
Officials said there was progress on the issues of the borders of a future Palestinian state and security arrangements in the West Bank.
US Secretary of State Condoleezza Rice has just ended a visit to the region.
Ms Rice said she still hoped for a peace deal before President George W Bush leaves office in January.
Mr Bush is visiting Israel later this month to take part in ceremonies marking the 60th anniversary of the founding of the Israeli state.
Palestinian-Israeli talks, launched at a Middle East conference hosted by Mr Bush in November, have yielded little visible progress so far.
Mr Olmert told the Palestinian Authority president on Monday he understood the need for Palestinians to see improvements in their standard of living if a peace deal were to work, officials said.
They said the sides had exchanged maps on a future Palestinian state that may indicate a narrowing of differences.
"We have made significant progress on the two issues of outlining the borders of the future Palestinian state and the security arrangements between Israel and the Palestinian state," a senior Israeli official said.
Ms Rice, speaking on her way home from the region, said US embassy staff were to monitor the effect on the Palestinians of any removal of Israeli roadblocks in the West Bank.
The Palestinians say the presence of hundreds of roadblocks is crippling their economy.
The Israelis say they are designed to thwart potential suicide bombers.
On Sunday, at a joint news conference with Mr Abbas in the West Bank city of Ramallah, Ms Rice described continued Israeli settlement activity as "particularly problematic".
Israel insists that no new settlements are being built in the West Bank, although existing ones are being expanded.