Israel's Benjamin Netanyahu demanded that Palestinian president Mahmud Abbas “choose between peace with Israel or peace with Hamas.”- Photo by AFP

CAIRO: Rival Palestinian groups Hamas and Fatah reached an “understanding” in Cairo on Wednesday to set up a transitional unity government and hold elections, Egyptian and Fatah sources said.

Israel's Benjamin Netanyahu reacted immediately, demanding that Palestinian president Mahmud Abbas “choose between peace with Israel or peace with Hamas.”

Egypt's official MENA news agency said the factions “reached a complete understanding after talks on all the points, including the formation of a transitional government with a specific mandate and setting a date for elections.”

Egypt will now call a meeting of all Palestinian factions to sign a reconciliation agreement in Cairo, MENA added.

Fatah delegation chief Azzam al-Ahmad confirmed the report and told AFP the two sides had agreed to set up a “government of independents.”

"This government will be tasked with preparing for presidential and legislative elections within a year," Ahmad said in a phone call with AFP in Ramallah.

There was no immediate confirmation from Hamas, which has ruled the Gaza Strip since 2007. Netanyahu said such an agreement paved the way for Hamas to take control of the West Bank too, where Abbas and the Palestinian Authority have their headquarters.

“The Palestinian Authority must choose between peace with Israel or peace with Hamas. There cannot be peace with both because Hamas strives to destroy the state of Israel and says so openly,” Netanyahu said.

“I think that the very idea of reconciliation shows the weakness of the Palestinian Authority and creates the prospect that Hamas could retake control of Judea and Samaria just like it took control of the Gaza Strip,” he said, referring to the West Bank.

Nabil Abu Rudeina, a spokesman for Abbas, dismissed these remarks.

“In reaction to Netanyahu's remarks we say that Palestinian reconciliation and the agreement reached today in Cairo is an internal Palestinian affair,”Nabil Abu Rudeina told AFP.

Netanyahu, he said, “must choose between peace and settlements.”Hamas and Fatah were on the verge of agreeing to the same deal in October 2009 but the militant movement backed out, protesting the terms had been revised without its consent.

Wednesday's deal was brokered in Cairo where the factions met with Egypt's new spy chief Murad Muwafi, whose predecessor Omar Suleiman tried unsuccessfully to bridge a split that has left Gaza and the West Bank ruled by rival administrations.

The Hamas delegation included senior members from Gaza as well as its Damascus-based deputy leader, Mussa Abu Marzuk.

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