UPDATE 1-Abbas sees Palestinian unity as Fatah rallies in Gaza

Nidal al-Mughrabi

* Palestinian rivals signal desire for reconciliation

* Egypt plans new talks between Hamas and Fatah

* Israel fears Hamas could topple Abbas

(Recasts for Abbas comments)

GAZA, Jan 4 (Reuters) - President Mahmoud Abbas predicted

the end of a five-year split between the two big Palestinian

factions as his Fatah movement staged its first mass rally in

Gaza with the blessing of Hamas Islamists who rule the enclave.

"Soon we will regain our unity," Abbas, whose authority has

been limited to the Israeli-occupied West Bank since the 2007

civil war between the two factions, said in a televised address

to hundreds of thousands of followers marching in Gaza on

Friday, with yellow Fatah flags instead of the green of Hamas.

The hardline Hamas movement, which does not recognise

Israel's right to exist, expelled secular Fatah from Gaza during

the war. It gave permission for the rally after the deadlock in

peace talks between Abbas's administration and Israel narrowed

the two factions' ideological differences.

The Palestinian rivals have drawn closer since Israel's

assault on Gaza assault in November, in which Hamas, though

battered, claimed victory.

Egypt has long tried to broker Hamas-Fatah reconciliation,

but past efforts have foundered over questions of power-sharing,

control of weaponry, and to what extent Israel and other powers

would accept a Palestinian administration including Hamas.

An Egyptian official told Reuters Cairo was preparing to

invite the factions for new negotiations within two weeks.

Israel fears grassroots support for Hamas could eventually

topple Abbas's Palestinian Authority (PA) in the West Bank.

"Hamas could seize control of the PA any day," Israeli Prime

Minister Benjamin Netanyahu said on Thursday.

The demonstration marked 48 years since Fatah's founding as

the spearhead of the Palestinians' fight against Israel. Its

longtime leader Yasser Arafat signed an interim 1993 peace

accord that won Palestinians a measure of self rule.

Hamas, which rejected the 1993 deal, fought and won a

Palestinian parliamentary election in 2006. It formed an uneasy

coalition with Fatah until their violent split a year later.

Though shunned by the West, Hamas feels bolstered by

electoral gains for Islamist movements in neighbouring Egypt and

elsewhere in the region - a confidence reflected in the fact

Friday's Fatah demonstration was allowed to take place.

"The success of the rally is a success for Fatah, and for

Hamas too," said Hamas spokesman Sami Abu Zuhri. "The positive

atmosphere is a step on the way to regain national unity."

Fatah, meanwhile, has been riven by dissent about the

credibility of Abbas's statesmanship, especially given Israel's

continued settlement-building on West Bank land. The Israelis

quit Gaza unilaterally in 2005 after 38 years of occupation.

"The message today is that Fatah cannot be wiped out," said

Amal Hamad, a member of the group's ruling body, referring to

the demonstration attended by several Abbas advisers. "Fatah

lives, no one can exclude it and it seeks to end the division."

In his speech, Abbas promised to return to Gaza soon and

said Palestinian unification would be "a step on the way to

ending the (Israeli) occupation".

(Editing by Dan Williams, Alistair Lyon and Jason Webb)