GAZA, Dec 8 (Nidal al-Mughrabi and Crispian Balmer/Reuters) - Hamas leader Khaled Meshaal, in a defiant speech during his first ever visit to Gaza, told a mass rally on Saturday he would never recognize Israel and pledged to free the land of Palestine inch by inch.

A sea of flag-waving supporters poured into the city center for celebrations to mark the 25th anniversary of the founding of the Islamist group, which has ruled the Gaza Strip - a small splinter of coastal land - since 2007.

Meshaal was born in the nearby West Bank but spent all his adult life in exile before arriving in Gaza on Friday for a triumphal visit. The trip comes two weeks after an eight-day conflict between Israel and Hamas that ended with a ceasefire.

Palestine is ours from the river to the sea and from the south to the north. There will be no concession on an inch of the land, he told the crowds, saying he wanted the Palestinians to have all the territory that makes up modern-day Israel.

We will never recognize the legitimacy of the Israeli occupation and therefore there is no legitimacy for Israel, no matter how long it will take, he said.

Hamas said 500,000 attended the four-hour rally, held under a leaden winter sky. There was no independent crowd estimate.

Oh dear Meshaal, your army struck Tel Aviv, supporters chanted, referring to missiles that Hamas's Qassam military brigade fired for the first time last month at Israel's largest city, 70 km (40 miles) up the coast, and also at Jerusalem.

Oh Qassam, do it again, hit Haifa next time, the crowds said, referring to a port city north of Tel Aviv.

Hamas said it won the short conflagration, which killed some 170 Palestinians and six Israelis, mostly civilians. Israel disputes this, saying it not only killed Hamas's top military commander but also destroyed much of the group's arms stockpile.

HAMAS MAKES PRIME TIME

Once treated as a pariah organization by its neighbors, Hamas has seen its standing in the region rise on the back of Arab spring uprisings that have ushered in several sympathetic Islamist governments sharing much of its own ideology.

Underlining its improved status, delegations from a host of friendly states, including Qatar, Turkey, Egypt and Bahrain, all attended the rally. By contrast, Israel, the United States and most Western governments view Hamas as a terrorist group.

Meshaal picked out neighboring Egypt for particular praise, calling it our backer. He then took a swipe at Syrian President Bashar al-Assad, who has led a deadly crackdown against a nationwide rebellion in his country.

Hamas does not support any regime or state that launches a bloody battle against its people, said Meshaal, who quit his home in Syria earlier this year after falling out with Assad.

Meshaal is seen as more moderate than many other Hamas officials, and although he stuck to the group's hard line on Israel, he held out the chance of reconciliation with the rival Palestinian faction Fateh, which holds sway in the West Bank.

After the Gaza victory, it is time now for ending this chapter of division and build Palestinian unity, he said.

Hamas kicked Fateh out of the Mediterranean enclave after a brief civil war and all attempts to reconcile the two groups have failed so far.

HAMAS OPEN TO LONG-TERM TRUCE

While Hamas rejects dialogue with Israel, Palestinian President Mahmoud Abbas and his Fatah party say they want a negotiated deal based on the lines that existed before the 1967 war, when Israel took the West Bank, East Jerusalem and Gaza.

Israel unilaterally left Gaza in 2005, but still imposes a land and sea blockade that it says is necessary to prevent arms smuggling. It continues to occupy the West Bank and has annexed East Jerusalem - a move not recognized internationally.

Hamas's charter calls for the destruction of Israel but its leaders have at times indicated a willingness to negotiate a prolonged truce in return for a return to 1967 lines - something Meshaal made no mention of at Saturday's event.

Israel tried and failed to assassinate Meshaal in 1997 and has stayed silent about his visit to Gaza. However, Israeli officials ridiculed the anniversary commemoration.

Hamas celebrates 25 years of murdering Israelis by rockets and suicide bombings as well as executing Fateh members and violating ... human rights, Ofir Gendelman, a spokesman for Israeli Prime Minister Benjamin Netanyahu, said on Twitter.

In another shot across Israel's bows, Meshaal promised to free Palestinians jailed in the Jewish state, indicating Hamas would try to kidnap Israeli soldiers to use as bargaining chips.

Israel last year released 1,027 Palestinians from its jails in return for the liberation of Gilad Shalit, a conscript soldier who was seized by Palestinian guerrillas in 2006 and hidden away for more than five years in Gaza.

Thousands of Palestinians remain in Israeli jails, many accused of terrorism. Hamas says they are freedom fighters.

We will not rest until we liberate the prisoners. The way we freed some of the prisoners in the past is the way we will use to free the remaining prisoners, Meshaal said.

TOY GUNS, MODEL ROCKET

Meshaal, born in the West Bank in 1956, left with his family for exile in 1967 after Israel captured the territory.

He now spends his time between Cairo and Qatar, and was expected to cross back into Egypt on Sunday or Monday to resume his position as Hamas's key point person with foreign donors.

Saturday's rally was staged against the backdrop of a gigantic, panoramic picture of Jerusalem, including the golden-domed al-Aqsa mosque, which is one of Hamas's symbols.

A massive model of a Gaza-manufactured rocket dominated the set and small boys in army fatigues holding toy guns trooped onto the platform to be embraced by Meshaal.

Speaking before him, a man identified only as a senior leader of the Qassam armed wing, his face covered by a checkered keffiyeh, said Hamas had used just a 10th of its capabilities in the November conflict with Israel.

This is evidence that the time of the occupation is over, your time Zionists is over. Your Frankenstein state is collapsing, he said. (Additional reporting by Marwa Awad; Editing by Mark Heinrich)