Israel said on Thursday a Palestinian unity deal would sabotage prospects for peace and stemmed from panic by Hamas and Western-backed President Mahmoud Abbas over popular uprisings in Syria and Egypt.

The surprise reconciliation between the Islamist group that runs Gaza and Abbas's Fatah movement that exercises limited self-rule in the West Bank presented a new challenge for Israel as it mounts a diplomatic drive against a Palestinian campaign to win UN recognition of statehood ambitions in September.

'The agreement between Fatah and the terror organisation Hamas is a fatal mistake that will prevent the establishment of a Palestinian state and will sabotage chances of peace and stability in the region,' Israeli President Shimon Peres said.   

Peres, a respected elder statesman, said in a statement he feared Hamas would ultimately take over the West Bank after a Palestinian election envisaged by the unity deal and that the influence of Hamas ally Iran would be strengthened as a result.

Peace talks between Israel and Abbas's administration resumed in September in Washington but quickly fizzled after Prime Minister Benjamain Netanyahu refused to extend a partial building freeze in Jewish settlements in the occupied West Bank.
Speaking publicly for the first time since the reconciliation pact was unveiled on Wednesday, Abbas signalled negotiations with Israel would still be possible during the term of a new interim government formed under the agreement.   

He said the Palestine Liberation Organisation (PLO), which he heads and to which Hamas does not belong, would still be responsible for 'handling politics, negotiations'. But Abbas said Palestinian unity is vital.

'Dislike, agree or disagree (with Hamas) -- they're our people. You, Mr Netanyahu (are) our partner,' Abbas, speaking in English, told Israeli peace activists who met him.

Israeli leaders have said they cannot talk to Hamas, which has spurned Western demands to renounce violence, recognise Israel and accept existing interim peace agreements.   

'This (unity) deal ... stems from panic -- a huge panic,' Foreign Minister Avigdor Lieberman told Army Radio, a view echoed by Defence Minister Ehud Barak in a separate interview.   

'(Hamas leader) Khaled Meshaal, sitting in Damascus, sees his patron President (Bashar) Al-Assad shooting up mosques, tanks firing deliberately (at civilians), and understands the ground is burning under him,' the far-right minister said.

In the West Bank and Gaza Strip, Palestinians said the unity accord was born of a deep-seated popular desire to overcome the Hamas-Fatah divide and reflected frustration over the slow move towards statehood.

'The signing of the agreement is very, very good and I pray to God to make it succeed because we are one people in one trench,' said Salman Al-Dairi, 50, who described himself as a Fatah supporter in Gaza.

Lieberman also said Abbas had 'leaned for years' on Hosni Mubarak, the Egyptian president toppled by a pro-democracy revolt in February, and now felt his own position was shaky.

The result, according to Lieberman, was an alliance between Palestinian factions that 'crossed a red line' for Israel.   

He held out the possibility of withholding Palestinian tax revenues that Israel transfers to the Palestinian Authority and a suspension by the US Congress of crucial financial aid to Abbas's administration if it shares power with Hamas.   

Abbas has said he will not return to US-sponsored peace negotiations until settlement-building is halted in the West Bank and in East Jerusalem, areas Israel captured in a 1967 war and which Palestinians want as part of a future state. - Reuters