Prime Minister Benjamin Netanyahu confirmed on Monday that Israel has agreed a deal to thaw relations with Turkey and said it would be a huge boost for the economy.

Speaking in Rome after talks with US Secretary of State John Kerry, Netanyahu told reporters: "I think it's an important step here to normalise relations."

Earlier, an Israeli official had said Israel and Turkey reached a deal on Sunday to normalise ties that soured in 2010 after a deadly Israeli raid on a Turkish aid ship heading to Gaza.

Both sides have been seeking a deal in recent months, with Israel in search of a potential customer for its offshore gas exports and Turkey wanting to restore its regional clout.

Netanyahu said he would lay out the deal in detail later in the day, but said it "has immense implications for the Israeli economy, and I use that word advisedly".

"And I mean positive, immense implications," he said.

Kerry also hailed the deal as a "positive step".

Israel has committed to depositing some $20 million in a fund for compensation for the families of Turkish victims of the raid, the Israeli official said, ending all claims against Israeli soldiers.

Netanyahu has also come under pressure within Israel not to agree to the deal if it does not include provisions for Hamas to hand over four missing Israelis, including the remains of two soldiers presumed dead and two civilians believed held alive by Hamas in Gaza.

The Israeli official said Turkish President Recep Tayyip Erdogan agreed to instruct "all relevant Turkish agencies to help resolve the issue of Israel's missing citizens".

The deal is to result in the restoration of ambassadors, the Israeli official said.