The Israeli government called off talks to broker a resumption of negotiations with the Palestinian Authority after rival Palestinian factions, Fatah and Hamas, signed a reconciliation deal on Wednesday.

The agreement was signed in Gaza at the home of Hamas Prime Minister Ismail Haniyeh.

Under the terms of the deal, Palestinian President Mahmoud Abbas will form a five-week unity government, which he will head along with Mr Haniyeh and a Fatah official as his deputies.

Six months after the government is formed, elections are to be held in the West Bank and Gaza for the presidency, the Palestinian Legislative Council and the PLO. In addition, a special committee will be formed to integrate Hamas into the Palestinian national organisations.

It is still unclear how the Palestinians plan to overcome the obstacles that scuppered the previous reconciliation agreements signed in Doha and Cairo.

A major stumbling block was the issue of who should take responsibility for the Fatah-dominated security organisations in the West Bank, which co-operate closely with Israel, and the Gaza border-crossings, currently controlled by Hamas.

On Tuesday, before the agreement was signed, Mr Abbas said in a meeting with Israeli journalists in Ramallah that “we have factions and parties just like you have. Hamas is part of the Palestinian people and there is no contradiction between reconciliation and the diplomatic process”.

Israel, however, sees it differently. Prime Minister Benjamin Netanyahu said on Wednesday that Mr Abbas “has to choose between peace with Israel and peace with Hamas. He can’t have it both, we hope he chooses peace.”

Attempts to find a formula for extending the talks beyond the end of the month continued until Tuesday, with Israeli and Palestinian delegations meeting in Jerusalem. However, a meeting scheduled to take place on Wednesday night was cancelled by Israel in the wake of the signing in Gaza.

While Israel has not officially called time on the talks, the deal between Fatah and Hamas has left it much less willing to grant any of the concessions demanded by the Palestinians. Chief among them is the request that Israel release more prisoners and a commitment to hold talks on the future borders of a Palestinian state over the next three months.

A senior source in the Obama administration told Israeli media on Wednesday that the Americans would only recognise a new Palestinian government that recognises Israel, adheres to the previous agreements signed and officially denounces violence.

It is yet unclear from the reconciliation agreement what the new government’s policy will be towards Israel and how this impacts on Hamas, which officially still supports the “armed struggle” while intermittently enforcing ceasefires on Gaza’s borders.

In a stark reminder of the situation in Gaza, shortly after the signing, an Israeli aircraft attacked a target in Beit Lahiya, in the north of the Strip, wounding seven Palestinians.

According to Israeli security sources, the aim had been to attack an operative who was involved in firing missiles at Israel, although it was unclear whether or not he was hit. Four rockets were launched from Gaza, landing in the Ashkelon area, without causing casualties.