JERUSALEM (Reuters) - Israeli Prime Minister Ariel Sharon said he was very satisfied with efforts by Palestinian President Mahmoud Abbas to restore calm and pledged in an interview published on Thursday to pursue peace with him.

"There is no doubt that Abu Mazen (Abbas) has begun to work," Sharon told the Yedioth Ahronoth daily.

"I am very satisfied with what I hear is happening on the Palestinian side, and I have a serious interest in advancing the process with him."

Abbas, speaking after talks with U.S. envoy William Burns, urged Israel to agree quickly to a cease-fire with Palestinian militants and said he was looking forward to holding a still unscheduled summit with Sharon.

A Palestinian official said Israel had already agreed to free 500 of some 7,000 Palestinians it is holding. Israeli political sources confirmed Israel was considering letting hundreds of prisoners out as a goodwill gesture to Abbas.

In another sign of change after Yasser Arafat´s death, Palestinians voted in the Gaza Strip´s first municipal election, a test of strength between Abbas and the militant Hamas, which is popular in the territory Israel plans to leave this summer.

Abbas, elected president on Jan. 9 on a platform of ending more than four years of bloodshed, has been pursuing a truce deal with Hamas and other militant groups. Violence has dropped sharply in Gaza, raising hopes peacemaking can be revived.

"I intend to advance the chance of a settlement with the Palestinians," Sharon said. "I intend to be accommodating toward Abu Mazen while at the same time remaining vigilant and assessing the situation on their side."

Israel says it will answer quiet with quiet and has shelved major military operations, but refused to stop selective raids.

But Abbas suggested he needed formal word from Israel that it would hold its fire in order to get militant factions behind a truce they insist must be mutual.

"The Israelis have to respond quickly. We cannot wait for a week or two," Abbas said in the West Bank city of Ramallah.

LACK OF TRUST

Abbas and Sharon are expected to meet next month for talks likely to focus on coordinating the planned pullout from the Gaza Strip and ways to restart a U.S.-backed peace "road map" charting incremental steps toward a Palestinian state.

In Washington, Israeli Foreign Minister Silvan Shalom spoke of "a deep lack of trust between the sides" that must be rebuilt step-by- step.

Shalom, speaking to Army Radio after meeting newly confirmed Secretary of State Condoleezza Rice, said it would be unwise to jump straight to negotiations on a final peace treaty.

He also said a truce in itself, without any move by Abbas to disarm militant groups as stipulated by the road map, was no solution.

"A cease-fire is a ticking bomb that will explode in our faces. Therefore a cease-fire cannot be a long-term goal -- certainly not when (militant factions) are preserving their infrastructures," Shalom said.

Across the Gaza Strip, thousands turned out to vote for candidates vying for 118 seats in 10 municipal councils.

"The election is our way of getting rid of corruption," Mohammed Abu Harbeed, a supporter of pro-Hamas candidates.

Hamas, which advocates Israel´s destruction, made significant inroads in last month´s West Bank municipal elections in which the mainstream Fatah came out ahead. (Additional reporting by Wafa Amr and Diala Saadeh in Ramallah and Nidal al-Mughrabi in Gaza) (© Reuters 2005 01/27/05)