Although several key points remained to be negotiated, the rival factions declared their coalition amid considerable pomp and ceremony after two days of Saudi-brokered talks in Mecca.

It was far from clear that the terms of the deal would satisfy Israel and the international community enough to lift the 11-month blockade of the PA. But it appeared to reflect progress in solving ­ at least momentarily ­ the bitter rivalry between the two main Palestinian factions. It was greeted with relief and celebratory gunfire in Gaza, where internecine fighting cost 29 lives last week.

Khaled Mashaal, the Damascus based leader of the Hamas delegation, insisted that violence must stop "immediately" and appealed to "our young people that this is an agreement of the leadership of the biggest groups and none of you should accept any order from others to fire".

The Palestinian President Mahmoud Abbas said at the signing ceremony in the presence of King Abdullah of Saudi Arabia that "we hope that all shameful acts will now be halted." Mr Abbas declared it will " satisfy our people... and bring us to the shores of peace".

But there was confusion last night over what concessions had been made by Hamas. The coalition government will continue to be led by one of its leaders, Ismail Haniyeh, the current Prime Minister. Unsurprisingly, no text emerging from the talks contained an explicit Hamas recognition of Israel.

The formal letter of Mr Abbas's reappointment of Mr Haniyeh contained references to the need to "respect" (Mr Abbas had reportedly preferred "commit to") previous agreements signed with Israel by the PLO and also called on the new government to abide by previous decisions of the Arab League.

Those include the 2002 Beirut decision in favour of King Abdullah's peace plan which offered pan-Arab recognition of Israel in return for the latter's agreement to a two-state solution on 1967 borders. Fatah sources had suggested such a text meant that Hamas had agreed for the first time to accept the 2002 initiative.

Miri Eisin, the spokesman for Israel's Prime Minister Ehud Olmert, said: " Israel expects the new Palestinian government to accept and respect all three of the international community's principles, ie, recognition of Israel, acceptance of all former treaties and a clear renunciation of all terror and violence."