CAIRO — The Egyptian foreign ministry has been charged with overseeing the exchange of an Israeli-American alleged spy being held in Egypt for Egyptian prisoners in Israel, the official Mena news agency reported late Thursday.

The foreign ministry will be responsible "for overseeing the exchange of spy Ilan Grapel for Egyptian prisoners, and to take all legal measures to this effect," the agency said.

The decision was made during a meeting of the cabinet of Egyptian Prime Minister Essam Sharaf.

Grapel, who has been in custody since June 12, is accused of being an agent of Israel's Mossad intelligence agency and of sowing sectarian strife and chaos in Egypt during the uprising which ousted president Hosni Mubarak in February.

Israel has strongly denied the claims, insisting the whole thing was a mistake and accusing Egyptian authorities of "bizarre behaviour."

On Monday, unnamed Israel officials told public radio that a deal was in the works to release a US-Israeli joint national held in a Cairo prison in exchange for 81 Egyptians held in Israel.

News of the alleged deal emerged the day before an Egyptian-brokered prisoner swap which saw Israel agree to release a total of 1,027 Palestinians in exchange for captive soldier Gilad Shalit.

Details of a possible agreement for Grapel's release were first reported by Egyptian state-owned Al-Ahram newspaper on Sunday, which said Israel and Egypt were close to agreeing a deal "in which the spy Ilan Grapel... will be released in return for all Egyptians held in Israeli prisons."

Israel is holding 81 Egyptian prisoners, including three children, most of whom are facing criminal charges, including illegal entry to Israel, drug trafficking and arms possession.

"The success of the Egyptian mediation of the Shalit deal and Israel's formal apology to Egypt for the death of Egyptian soldiers killed on the border by Israeli fire, certainly cleared the road for making the Grapel deal," the paper said.