Kidnapped Israeli soldier Gilad Shalit is in good condition and will be set free soon, Egyptian President Hosni Mubarak said.

In an exclusive interview with Yedioth Aharonoth published Friday, Mubarak also discussed the Israeli-Palestinian peace process.

A deal for Shalit's return was on the brink four or five months ago but Israel changed its position and the deal collapsed, Mubarak told the Tel Aviv, Israel, newspaper.

Regarding the Israeli-Palestinian conflict, Mubarak said meetings are under way between Israeli and Egyptian officials.

The main obstacles to peace are Jerusalem and the right of return for Palestinian refugees, he said. The correct solution for Jerusalem is what was agreed upon by former U.S. President Bill Clinton, Israeli Defense Minister Ehud Barak and the late Palestinian leader Yassar Arafat, he said: East Jerusalem as the capital of the Palestinian state and West Jerusalem as the Israeli capital.

Jerusalem's sovereignty must be decided, the Egyptian president said. The refugee issue is mainly psychological, he said, noting a Palestinian who studied, married and raised a family in the United States has no reason to return.

Israel's insistence that it remain a Jewish state is a serious mistake that will only harm it and turn it into a terrorists' target, Mubarak warned.