Israel is set to release 26 Palestinian prisoners in the early hours of Tuesday as part of US-brokered peace talks, after a court rejected a last-minute appeal by victims' families.

The prisoners were expected to be freed just after midnight, in the third stage of the release of 104 inmates that Israeli Prime Minister Benjamin Netanyahu committed to let go when the peace talks were renewed in July.

The move comes a day before US Secretary of State John Kerry is set to return to the region in a bid to boost the faltering negotiations.

As with the two previous releases in August and October, each of 26 prisoners, bereaved Israeli families represented by the Almagor organisation petitioned Israel's High Court against the move.

Almagor noted five of the latest 26 to be freed were from annexed east Jerusalem and considered as residents by Israel, but should not be released without the government debating the issue as Netanyahu promised.

But the court rejected the petition, saying the five's residency did not make the government decision to release them "unreasonable".

The 26 inmates were jailed before the signing of the 1993 Oslo accords, which formally launched the Middle East peace process, and have served 19 to 28 years for killing Israeli civilians or soldiers.

Besides the east Jerusalem residents, 18 of the prisoners are from the occupied West Bank, with another three from Gaza, according to Sivan Weizman, a spokesman for the Israeli prisons service.

On Monday evening, Palestinian militants in the Gaza Strip fired a rocket that struck Israel, a police spokesman told AFP, causing no damage. No organisation claimed responsibility.

The Islamist Hamas movement that rules Gaza objects peace talks between the Palestinian Authority and Israel.

In the West Bank, families of the prisoners were eagerly waiting at the Ofer military prison from where the prisoners would be set free and taken to the PA headquarters in Ramallah, where they would be received by president Mahmud Abbas.

The Palestinians hailed them as heroes imprisoned for fighting against the Israeli occupation.

Emotions were also high on the Israeli side, where the jailed militants were viewed as murderers.

Some 150 protestors marched from the premier's residence in Jerusalem to the Western Wall in the eastern sector of the city, holding black umbrellas in the rain, bearing pictures of their bereaved relatives and posters with slogans against the release.

A handful of them were proceeding to the east Jerusalem home of one of the prisoners to be freed, public radio said.

Tuesday's release was expected to be accompanied by announcements of new construction plans for Jewish settlements in the occupied West Bank, including east Jerusalem, as the previous two prisoner releases were, a move likely to infuriate the Palestinians and international community.

Kerry will have to deal with such an announcement, if made, when he arrives on New Year's Day on his 10th trip to the region since March.

The US secretary of state has been pressing Israel and the Palestinians to agree a framework for a final settlement ahead of an agreed late April target date for the talks to conclude.

He will also have to quell tensions that rose after an Israeli ministerial committee on Sunday gave initial approval to a bill annexing Jordan Valley settlements, in a largely symbolic move expected to be shot down by the government.

The Palestinians countered by announcing their Tuesday cabinet meeting will take place in that contested territory, which would be the eastern border of their future state.

Israel wants to keep a military presence there, but the Palestinians firmly reject such a notion.