Cairo has played down the scope of the work along the 14-km (8-mile) frontier, but the Islamist group Hamas condemns it as a "wall of death" that could complete an Israeli-led blockade of Gaza by eliminating smugglers' tunnels from the Egyptian Sinai.
"The Egyptians are working on a project which I hope will be completed by the end of the year," said the senior Israeli official, speaking on condition of anonymity.
"This project, which involves laying a steel barrier 20 meters underground as well as a security system, should stop most of the smuggling along the Philadelphi (corridor)," the official said, referring to the border between Gaza and Egypt.
Israel has long lobbied Egypt to tackle the cross-border smuggling, which supplies Palestinians with both munitions and basic commercial goods lacking in Gaza because of the Israeli blockade on the rest of Gaza's land border. "I can't say we are completely satisfied, but we have noted that the Egyptians are taking action," the official said.
Senior Israeli and Egyptian officials meet regularly to discuss regional security issues.
Egyptian officials have said steel tubes are being placed at several points along the frontier to form a barrier, but have not elaborated on its purpose. Unlike Israel, Egypt maintains relations with Hamas and has an Islamist opposition movement.
Citing an unnamed Egyptian intelligence source, Israeli media reports have said the wall will be rigged with sensors and pressurised hoses to flood tunnels with seawater.
Tunnel builders say some 3,000 underground passages were operational before Israel launched a three-week offensive against Gaza over a year ago, but only 150 are still operating after the conflict and subsequent Israeli air raids.
Israel says Hamas has used the tunnels to replenish its rocket and small-arms arsenal since the war. Israeli officials have said Hamas has also increased the range of its short-range rockets and acquired anti-tank and anti-aircraft missiles.
Since the Gaza conflict, Hamas has been trying to stop other militant groups from firing rockets into Israel to avoid retaliation.
A previously unknown group, Ansar Al-Sunna, claimed responsibility for a rocket attack on Israel on March 18 that killed a Thai hothouse worker, the first fatal rocket attack for more than a year.
