PALESTINE - Sept 10 - Deal Reached On Palestinian Unity.

The militant Palestinian group Hamas and the more moderate Fatah party agrees to form a government of national unity, bringing a step nearer the possibility of an end to the economic siege in the Palestinian territories. The new coalition agreement was likely to be based on Hamas's implicit recognition of Israel, a key western condition for the resumption of aid that was suspended after the group took control of the PA in March. "Efforts in the next few days will continue to complete the formation of the national unity government", said Palestinian Pres Mahmoud Abbas, of the Fatah party. A national unity government makes it much more likely the EU will re-establish contacts with the PA - including with Hamas officials. It will also put pressure on the US, which has taken the lead in denouncing Hamas. The west classifies Hamas as a terrorist group and has withheld aid to the Palestinians, who received a total of around $30m a month before the militant group swept to victory in January elections. In addition, Israel suspended the transfer of about $50m in monthly tax revenues to the PA, leading to the non-payment of salaries to 160,000 Palestinian public sector salaries in the past six months. For weeks, the EU sought to convince Palestinians to establish a unity government, arguing it would help end the occupied territories' international isolation. At present the EU is providing "allowances" for individual Palestinians, including health workers, but has stopped direct aid to the PA. The EU's foreign policy chief Javier Solana, said this month that if a unity government signed up to a platform that implicitly recognised Israel, the EU would see it as a "partner". He added: In that case, the US will accept it also". Hamas spokesmen were quick to point out the group would never "recognise the legitimacy of the occupation". But Palestinian officials said the new government's platform was likely to be based on an Arab peace initiative and a Palestinian prisoners' manifesto that many interpret as recognition of a two-state solution to the Israeli-Palestinian conflict. Israel's reaction was muted. The office of Israeli PM Ehud Olmert, refused to make a statement. A Foreign Ministry spokesman Mark Regev, said renewed momentum in the peace process depended on the release of an Israeli soldier, captured by Palestinian militants at the end of June, and a Palestinian government that renounced violence, recognised Israel and honoured past peace agreements. A European diplomat said Ismail Haniya of Hamas was likely to stay on as PM but it was important that non-Hamas officials served in important positions, such as the foreign and finance portfolios. A spokesman for the British PM Tony Blair, who visited the region in the last few days, said: Of course we have to see the details but potentially this is a highly significant announcement". In a separate development on Sept 11, Israel rejected a revamped peace plan proposed by Egypt and Jordan that would fix the borders of a Palestinian state before any confidence-building measures. The Egyptian and Jordanian proposals build on the Arab peace initiative seemingly about to be adopted by Hamas, which was originally put forward by the Arab League in Beirut in 2002. Israel said it wanted to stick to the US-backed but stalled "road map" - a series of reciprocal steps leading to the establishment of a Palestinian state.