Israeli Prime Minister Ehud Barak and Palestinian leader Yasser Arafat held their first face-to-face meeting today and pledged to begin working together promptly toward a peace agreement that will reshape relations between Israelis and Palestinians.

The new prime minister indicated that upon returning from a trip to Washington in a little over a week he will be ready to begin transferring territory, releasing Palestinian prisoners and carrying out other provisions of the suspended U.S.-brokered Wye River accords, a pledge welcomed by Palestinian leaders.

Barak and Arafat met for more than an hour at the Erez Crossing on the Israeli-Gaza Strip frontier and emerged saying that their initial talks laid the groundwork for more detailed peace discussions following Barak's meetings with U.S. and European leaders over the next 10 days.

Arafat called the session fruitful and constructive in remarks to reporters and said he feels confident that Barak "will continue on the path of the enhancement of peace."

Central to Palestinian hopes is progress on implementation of the Wye River land-for-security memorandum signed last fall by Barak's predecessor, Binyamin Netanyahu, and then promptly shelved after the Israeli leader accused the Palestinians of failing to meet their security pledges.

While not announcing what precise steps he will take on the Wye compact, Barak all but promised that his return from overseas will mark the start of progress on several fronts, including forging ahead with the Wye provisions and moves toward the "final status" negotiations between Israel and the Palestinians on the remaining points of disagreement between the two sides.

Those issues include the status of millions of Palestinian refugees whose families were displaced over the past half-century from land that is now part of Israel and the ultimate status of Jerusalem, Israel's capital and the city the Palestinians would like to become the center of an independent Palestinian state.

Barak, who took office last Tuesday, said there were "no illusions" on either side about the difficulty of the negotiations ahead, particularly since the Israeli leader hopes simultaneously to negotiate peace agreements with Syria and Lebanon. But he also said that as those talks begin he will live up to commitments Israel has already made.

"I will continue in the next 10 days with my round of meetings . . . and then, in coordination with the Palestinians, we will sit down to implement Wye," said Barak, specifically acknowledging that the promised release of more than 600 Palestinian prisoners would be "dealt with" in those discussions.

Barak said also that his government will not undertake any new Jewish settlements in the West Bank, and he even implied that some existing ones would be reviewed as part of the final status talks. Palestinians were angered when, after the Wye River signing last fall, the Netanyahu government allowed settlers to occupy more of the West Bank, a "land grab" that they demand be rescinded.

As head of a coalition that includes conservative religious and settler parties, the issue is one of the more sensitive that Barak must confront. "We are not going to establish a new settlement; we are not going to dismantle [any at present], and we are going to check, reassess or bring into discussion decisions by previous governments," Barak said.

For his part, Arafat promised to continue a tough "zero tolerance" policy toward anti-Israeli terrorism and violence. The Wye accords included agreements by the Palestinians to cooperate with the Israelis and U.S. advisers in policing the Palestinian self-governing areas in Gaza and the West Bank and to help prevent terrorist attacks. Although the Islamic Resistance Movement, or Hamas, operates in Palestinian-governed areas and continues to pledge to fight against Israel, the last few months have seen the fewest instances of terrorist activity in recent years.

Today's meeting -- the first such discussions between Israeli and Palestinian leaders since December -- was much anticipated by both sides, particularly by the Palestinians, as an important step toward rebuilding a relationship that soured during Netanyahu's three years in office.

One Arafat aide said the two leaders quickly established a "real chemistry," and their body language at an ensuing news conference was also positive as they shared an extended handshake and eye contact on the podium. They also exchanged gifts. Barak gave Arafat an elegant wooden box containing a Koran and a Bible; Arafat gave Barak a silver menorah shaped like a dove.

In Washington, a White House spokesman said President Clinton was pleased that the Middle East peace talks had resumed. "The president has been eager for the parties to get together and begin to move the peace process forward, and he is pleased that that process has begun," spokesman Barry Toiv said.

But the meeting also comes at a time of building cynicism among rank-and-file Palestinians about Israel's intentions. Gaza residents interviewed before the Barak-Arafat meeting, for example, repeatedly noted that Netanyahu began his term in office with rhetoric almost identical to Barak's but ended up reneging on a series of commitments.

Gaza was handed over to Palestinian control amid a surge of nationalist pride in their power to govern their affairs, but residents there now refer to the thin strip of arid land as a "big prison" because Israel has failed to provide an open passage between it and the Palestinian-controlled West Bank population centers, such as Hebron, Ramallah and Jericho.

The effect is a sort of economic isolation that hampers Palestinian efforts to develop businesses and forces merchants to abide by complicated and expensive shipping arrangements to meet Israel's security concerns, said Jihad Alwazir, managing director of the Palestine World Trade Center. "Our position is like Sisyphus; you push the rock up, and it falls back down," he said of the on-again, off-again peace process. "We have been through this so many times."

Among business people in Gaza, the possibility of a rapprochement with Israel means lower business costs, as barriers to moving goods and providing services fall, and also more sales, as the working conditions and wages of Palestinians improve. Some said they look forward particularly to the creation of a Palestinian state so they can build their own port facilities and roads and avoid Israeli customs duties and regulations.

In the central square of Gaza City, the outlook for peace with Israel took on a more emotional hue, as the families of Palestinian prisoners -- many held for actions carried out as part of the intifada, or uprising, against Israeli rule in the 1980s and early '90s -- staged a public appeal to Barak to meet another of Israel's Wye River promises.

With Arabic music pumping from speakers atop a truck donated to the municipality by the U.S. Agency for International Development, prisoners' mothers, cousins, wives and other relatives said that freeing them is something Barak could do quickly to persuade Palestinians he is serious about peace.

Esmahan Hajar said her son Fatih "was throwing hand grenades" during the intifada, which convulsed Gaza and the West Bank until Israeli-Palestinian peace talks began in earnest.

But, she added, "There would be peace and happiness" if Barak reunited Palestinian families. "I am 55 years old," she said, "and I don't know when I am going to die, [but] I won't live 99 years," -- the length of her son's sentence.

CAPTION: Israeli Prime Minister Ehud Barak, left, and Palestinian leader Yasser Arafat greet each other before beginning a meeting in which they were said to have established a "real chemistry."