CAIRO, May 4 (Marwa Awad/Reuters) - Palestinian leaders formally ended a four-year rift between the secular Fateh and Islamist Hamas groups at a ceremony in Egypt on Wednesday, a reconciliation they see as crucial to their drive for an independent state.

Israel, which in 1967 captured the West Bank and Gaza Strip, where the Palestinians seek statehood, decried the deal as a blow to prospects for peace.

We announce to Palestinians that we turn forever the black page of division, Palestinian President Mahmoud Abbas, Fateh's leader, said in his opening address.

Israeli Prime Minister Benjamin Netanyahu said during a visit to London: What happened today in Cairo is a tremendous blow to peace and a great victory for terrorism.

Hamas, whose founding charter calls for Israel's destruction, seized the Gaza Strip from Fatah forces in a brief Palestinian civil war in 2007. It has opposed Abbas's quest for a negotiated peace with the Jewish state.

There were US reservations about the Cairo ceremony. It's important now that Palestinians ensure implementation of that agreement in a way that advances the prospects of peace rather than undermines them, State Department spokesman Mark Toner said.

We'll wait and see what this looks like in real and practical terms... We still don't know what, if any changes, there will be at the governmental level, he said.

Toner said the United States continued to believe that Hamas must recognize Israel's right to exist, reject violence and abide by interim peace agreements if it wants to play a meaningful role in the political process.

He said the United States would look at the formation of any new Palestinian government before taking steps on future aid.    

LINGERING FRICTION?

In what appeared a sign of lingering friction, Hamas leader Khaled Meshaal did not share the podium with Abbas and the ceremony was delayed briefly over where he would sit.

Against expectations, neither signed the unity document.

Hamas leaders will meet Abbas next week, possibly in Cairo, to start work on implementing the accord, deputy Hamas leader Moussa Abu Marzouk said after the ceremony.

In his speech to the gathering, Meshaal said Hamas sought a Palestinian state in the West Bank and Gaza devoid of any Israeli settlers and without giving up a single inch of land or the right of return of Palestinian refugees.

Challenging Israel to peace, Meshaal offered to work with  Abbas and Egypt on a new strategy to solve the Arab-Israeli conflict but said he did not believe Israel was ready for peace.

We have given peace since Madrid till now 20 years, and I say we are ready to agree among us Palestinians and with Arab support to give an additional chance, Meshaal said, referring to the 1991 international Middle East peace conference that launched Israeli-Arab peace talks.

But, dear brothers, because Israel does not respect us, and because Israel has rejected all our initiatives and because Israel deliberately rejects Palestinian rights, rejects Fatah members as well as Hamas...it wants the land, security and claims to want peace, he said.

Hamas has stated before that it would accept as an interim solution in the form of a state in all of the territory Israel captured in the 1967 war, along with a long-term ceasefire.

Israel withdrew soldiers and settlers from Gaza in 2005. It has kept up settlement activity in the much larger West Bank.

The unity deal calls for forming an interim government to run the West Bank, where Abbas is based, and the Gaza Strip, and prepare for long-overdue parliamentary and presidential elections within a year.

In his speech, Abbas repeated his call for a halt to Jewish settlement construction as a condition for resuming peace talks with Israel that began in September but fizzled after the Jewish state refused to extend a limited building moratorium.

Abbas is widely expected, in the absence of peace talks, to ask the UN General Assembly in September to recognize a Palestinian state in all of the West Bank and Gaza. Israel and the United States oppose such a move.

The state of Palestine must be born this year, Abbas said.

Palestinians view reconciliation as an essential step toward presenting a common front at the United Nations and a reflection of a deep-seated public desire to end the internal schism amid popular revolts that have swept the Arab world.

But the deal presents potential diplomatic problems for Abbas's aid-dependent Palestinian Authority. Much of the West shuns Hamas over its refusal to recognize Israel, renounce violence and accept interim Israeli-Palestinian peace deals.

(Additional reporting by Nidal al-Mughrabi in Gaza, Ali Sawaftah in Ramallah and Washington bureau; writing by Sami Aboudi and Edmund Blair; editing by Mark Heinrich)