Palestinian President Mahmoud Abbas said on Saturday any unity government with Hamas would have to agree to a two-state solution with Israel, a demand quickly rejected by his Islamist rivals.

The disagreement could hamper Egyptian-brokered reconciliation talks aimed at ending a schism between the Hamas-ruled Gaza Strip and the occupied West Bank, where Abbas's Fatah faction holds sway.

"We are moving in steady steps towards ... a national unity government that abides by our known commitments, which include the two-state vision and the signed (peace) commitments," Abbas said in the West Bank city of Ramallah.

Hamas official Ayman Taha in Gaza said Abbas's comments undermine chances for reaching a unity agreement.

"We reject any pre-conditions in the formation of the unity government. Hamas will never accept a unity government that recognises Israel," Taha said.

A dozen Palestinian factions including Fatah and Hamas began reconciliation talks in Cairo on Thursday to try to agree by March 20 on a unity government. Previous efforts by Arab negotiators to reconcile Fatah and Hamas have failed.

A deal could lead to the lifting of Israel's blockade of the Gaza strip and boost Abbas's peacemaking efforts with Israel.

The United States, Israel and the European Union shun dialogue with Hamas, citing its refusal to renounce violence, to recognise Israel and accept past peace agreements.

Abbas launched formal peace talks with Israel in 2007, though the negotiations have lead to little progress.

Hamas leaders have offered a long-term truce with Israel in return for a viable Palestinian state in the West Bank and the Gaza Strip. The Islamist group continues to say it will not formally recognise Israel and its 1988 founding charter calls for the destruction of the Jewish state.