Israel's Cabinet has given final approval for a prisoner swap with Hezbollah which has been set on Wednesday.

Israeli President Shimon Peres said it was a tough decision.

"It's not a happy choice. On one hand, we have the most terrible murderer. On the other hand, we have our commitment to our own boys who were sent to fight for their country in danger, and it is our moral duty and our heartfelt wish to see them come back."

Under the exchange deal, Hezbollah will return two abducted Israeli soldiers in exchange for five imprisoned Lebanese militants, including murderer Samir Kuntar and the remains of some 200 Arabs.

Kuntar led a terrorist attack that killed four people, and has been jailed in Israel for the past three decades.

The swap deal was approved by the Israeli government about two weeks ago, under the condition that Hezbollah submit a report on long-missing Israeli airman Ron Arad.

Arad was held by the Amal Shi'ite group until 1988, when he disappeared.

The report obtained from Hezbollah included photographs of Arad and journal entries he had written, but was deemed "insufficient" by the defense establishment.