* Israel agrees to free first group of 104 inmates it pledged to free
* Prisoners due to go free after 48 hours
* Settlement plans come ahead of first prisoner release
* Palestinians condemn new housing but negotiations on track
Israel decided on Sunday to free 26 Palestinian prisoners over the next few days ahead of a new round of peace talks, in the first group of a total of more than 100 inmates it pledged to release as part of a U.S.-brokered resumption of negotiations.
Three senior members of Prime Minister Benjamin Netanyahu's cabinet and a panel of security officials agreed to the list of names, which they said would be published early on Monday.
The panel headed by Defence Minister Moshe Yaalon "approved the release of 26 prisoners," a statement from Netanyahu's office said. Fourteen would be deported or moved to the Gaza Strip and 12 repatriated to the occupied West Bank, it said.
Palestinian President Mahmoud Abbas had demanded the release of these men, held since before an interim peace deal in 1993, as a condition for renewing talks with Israel which had run aground in 2010 in a dispute over Jewish settlement building.
Israel agreed in principle last month to free 104 prisoners in four stages, depending on the progress of U.S.-brokered talks for Palestinian statehood that resumed on July 30 after Secretary of State John Kerry's intensive shuttle diplomacy.
Far-right members of Netanyahu's cabinet had opposed the release of prisoners with "blood on their hands." Many of those expected to go free were convicted of involvement of lethal attacks in which Israelis were killed.
The cabinet decision on Sunday said the inmates would not be freed for at least 48 hours to provide time for victims' families picketing government offices, to appeal to Israel's high court. The court rarely intervenes in such cases.
Softening the blow of the prisoner release for far-right members of Netanyahu's government, Israel also moved forward on Sunday with plans to build nearly 1,200 homes for Jewish settlers.
While condemning settlement expansion, Palestinians have stopped short of threatening outright to abandon the negotiations, which are due to go into a second round in Jerusalem on Wednesday after a session in Washington.
The Housing Ministry said on its website that tenders were issued for building 793 new apartments in areas of the West Bank that Israel annexed after capturing the territory and the eastern part of Jerusalem in the 1967 Middle East war.
Plots for the construction of 394 more units were being sold in Ariel, Efrat, Maale Adumim and Betar, settlements in areas Israel has said it aims to retain in any land-for-peace accord.
"We shall continue with construction, everywhere," Housing Minister Uri Ariel of the far-right Jewish Home party said at the formal relaunch of an Israeli housing project in East Jerusalem on Sunday.
Israeli Finance Minister Yair Lapid, whose centrist party is right-wing Prime Minister Benjamin Netanyahu's biggest partner in the governing coalition, called the decision to issue the settlement housing tenders "unhelpful to the peace process".
Mark Regev, an Israeli government spokesman, dismissed the criticism saying:
"The construction decided upon today in Jerusalem and in the settlement blocs are in areas that will remain part of Israel in any possible future peace agreement. This in no way changes the final map of peace. It changes nothing."
Drawing Palestinian anger, Israel's military-run Civil Administration in the West Bank gave preliminary approval on Thursday for the construction of more than 800 new settler homes - some of them in isolated settlements - but said it needed government approval before building could begin.
Most world powers regard all the settlements as illegal and Palestinians say the enclaves could deny them a viable and contiguous state.
"The international community must stand with this peace process and must stand shoulder to shoulder with us and hold Israel accountable for its continuing settlement activities," Palestinian chief negotiator Saeb Erekat told Reuters.
Some 500,000 Israeli settlers live in the West Bank and East Jerusalem amid 2.5 million Palestinians. Israel withdrew in 2005 from the Gaza Strip, which is now governed by Hamas Islamists opposed to permanent co-existence with the Jewish state.