SHARM EL-SHEIKH, Egypt, June 7 (Reuters/Marwa Awad) - US Vice President Joe Biden said on Monday that he was working closely with Egypt on new ways of dealing with the problems facing the Palestinians in Gaza as a result of the Israeli blockade.

Israel has faced international calls to lift the siege since a bloody seizure of a Turkish aid ship last week. Nine activists were killed in the assault by commandos and dozens injured, including some of the commandos.

We are consulting closely with Egypt, as well as our other partners, on new ways to address the humanitarian, economic, security, and political aspects of the situation in Gaza, Biden said in a statement.

The statement was issued after talks with Egyptian President Hosni Mubarak in the Egyptian Red Sea resort of Sharm el-Sheikh.

Egypt, the only country apart from Israel to border Gaza, opened its Rafah crossing last week to allow aid convoys into the coastal strip.

Cairo has only allowed limited crossing of the border since the Islamist group Hamas took control of Gaza in 2007, sparking criticism from some in the Arab public that it is assisting Israel. Cairo says it is protecting its national security.

A security source in Egypt, who declined to be identified, said Israel was under pressure from the international community to find an alternative policy to its blockade on Gaza and said a partial lifting of the blockade was in sight.

Israel must review its policies amid pressure from the international community regarding its blockade on Gaza. There will be a partial lifting of the blockade, the source said.

The Palestinian people will no longer complain of shortages of humanitarian aid or shortages of water, oil, medicine, electricity or fuel, the source said, adding this would still not solve problems such as a lack of infrastructure in Gaza.

Egypt is building an underground steel barrier on the border, a move analysts say is to stop smuggling arms and other items through tunnels. The underground barrier will be completed by the end of the summer, God willing, the source said, adding Egypt had stemmed the flow of weapons to Gaza.

Biden said last week that Washington backed Israel's right to board ships bound for Gaza to prevent weapons smuggling, but said the United States remained concerned about the plight of Palestinians there.

Israel imposed restrictions on Gaza after it pulled out troops and settlers in 2005. It tightened restrictions since then, including after Hamas captured Israeli soldier Gilad Shalit in June 2006.

Egypt, which in 1979 became the first Arab state sign a peace treaty with Israel, has sought to act as mediator in that dispute. But talks have faltered over numbers and which Palestinians Hamas wants Israel to release in return for Shalit.

We are trying to convince (Israeli Prime Minister Benjamin) Netanyahu that he must be flexible in the 'VIP' list (Palestinians that Hamas wants released) if the Shalit problem is to be solved. But they do not want to let go of the VIP list, the security source said.