Militant group Hamas and the Fatah-led Palestinian Liberation Organization (PLO) have agreed to form a technocrat unity government, according to a joint statement by the two groups.

"An agreement has been reached on the formation within five weeks of an independent government headed by president Mahmud Abbas," the statement said. Following the announcement, thousands of people in Gaza City took to the streets to celebrate.

The announcement came after Fatah and Hamas started their first reconciliation talks since 2007 when Hamas - an opponent to US-led peace talks with Israel - was voted into power in Gaza.

The agreement could pave the way for elections and a national strategy towards Israel. It could give Abbas some degree of sovereignty in Gaza but also help Hamas, which is hemmed in by an Israeli-Egyptian blockade, to become less isolated.

It is unclear, however, whether the unity government will be established, as Hamas and Fatah have failed to implement a 2011 Egyptian-brokered unity deal aimed at ending the political divide between Gaza and the Palestinian Authority-ruled West Bank.

Sharp rebuke from Israel

Israel's Benjamin Netanyahu reacted sharply to the news, as the apparent unity deal coincides with meetings between Palestinian and Israeli negotiators to try to extend the US-sponsored peace talks beyond an April 29 deadline.

"Does he (Abbas) want peace with Hamas or peace with Israel?," Netanyahu said to reporters on Wednesday

"You can have one but not the other. I hope he chooses peace. So far he hasn't done so," he said.

Israel's Foreign Minister, Avigdor Lieberman, said in a statement that Abbas, who heads the Palestinian Authority that exercises limited self-rule in the occupied West Bank, "cannot make peace both with Israel and Hamas, a terrorist organization that calls for Israel's destruction".

Abbas's spokesman, Nabil Abu Rdeineh, however, said Palestinian unity was an internal matter.

"Abbas chooses peace and the unity of the Palestinian people," Abu Rdeineh said. "The choice of unifying the Palestinian people enforces peace, and there is no contradiction whatsoever between reconciliation and negotiations."

Meanwhile, at least four people were wounded in an Israeli air strike in the Gaza strip. It came shortly after the Hamas-Fatah agreement had been announced.

US-led peace talks stalled

The US-led peace talks reached a stalemate when Israel refused to release a fourth and final group of Palestinian prisoners, in line with an earlier agreement. Since then, both sides have made demands the other deems unacceptable.

Over the weekend, Palestinian negotiators warned they may hand responsibility for governing the occupied territories back to Israel and dismantle the Palestinian Authority, if the Jewish state fails to release the prisoners and freeze settlement building.

But Israel says the demands are unacceptable. "He who makes such conditions does not want peace," an Israeli official told the AFP news agency on condition of anonymity.

ng/rc (Reuters, AFP, dpa)