Israel and Turkey have reached a preliminary agreement on normalising relations, an Israeli official said.
Ties broke down after the Israeli navy raided a flotilla trying to break Israel's blockade of Gaza in 2010. Ten Turkish activists were killed.
The deal will see Israel compensate families of those killed while Turkey will drop all claims against Israel, the unnamed official said.
There has been no official confirmation yet from either side.
The agreement is reported to have been reached at a meeting between senior Israeli and Turkish officials in Switzerland.
According to the official, the deal will also see the renewed exchange of ambassadors.
Talks will also begin on laying down a natural gas pipeline from Israel to Turkey, the official added.
Turkey is currently embroiled in a row with key gas supplier Russia over the downing of a Russian fighter jet by Ankara.
Israel and Turkey had been firm allies until the deadly raid on the flotilla, which had been trying to break Israel's blockade of Gaza.
Israel tightened maritime restrictions on Gaza from 2007, leading to a blockade which it says it a vital security measure against the militant Islamist group Hamas, which administers the territory.
Pro-Palestinian activists on board clashed with Israeli commandos who boarded the lead vessel in international waters, about 75 miles (120km) from the blockade zone.
Ten of the activists, one of them a Turkish American, were killed and 10 commandos were injured.