GAZA, May 15 (Reuters) - Leaders of rival Palestinian factions displayed rare unity on Saturday as they marked their day of catastrophe or nakba at a rally in Gaza, raising hopes of reconciliation between the two bitter rival parties.

It was the first time leaders from Islamist Hamas and the more secular Fatah movement of Palestinian President Mahmoud Abbas had shared the platform at a large public gathering since Hamas seized the Gaza Strip from Fatah in a 2007 civil war.

Palestinians mark nakba day on May 15, the day in 1948 when Israel declared statehood after which some 700,000 Arabs fled or were expelled in the war that ensued.

The rally, which was organised by the much smaller Islamic Jihad group to commemorate the nakba's 62nd anniversary, coincided with reports of serious talks between Hamas and Fatah to find ways to resolve their differences.

Top Palestinian businessman Munib al-Masri who has been heavily involved in recent mediation efforts, expressed cautious optimism, telling Reuters that the coming days may result in a positive outcome but we should not expect too much.

Masri has been mediating between the two groups' leaders in the Palestinian territories and in exile and has enlisted the support of Arab diplomats to help narrow the differences. Over two years of Egyptian mediation efforts have so far failed.

Masri's efforts have led to a phone discussion between senior Hamas leader Mahmoud al-Zahar and Fatah official Azzam al-Ahmed that has been well publicised among Palestinians.

Zahar told Reuters that if discussions with Fatah were successful the two sides would bring a joint proposal to Egyptian officials who are leading talks, saying that reconciliation has become an urgent necessity.

Fatah official Zakaria al-Agha said the unity shown at the rally was the start of a process to achieve reconciliation.

Hamas, which calls for the Jewish state's destruction and refuses to recognise agreements Fatah signed with Israel, has been locked in a power struggle with formerly dominant Fatah faction since it won a 2006 Palestinian election.

Iranian-backed Hamas scorns Abbas for his recognition of Israel and his declared readiness to renounce armed struggle.

Palestinian residents in the Gaza Strip and the West Bank have said the enmity between Hamas and Fatah following the 2007 Gaza standoff has wrecked the social fabric of Palestinian society and has undermined peacemaking with Israel.

The two groups continue to carry out arrests of activists affiliated with their rivals in Gaza where Hamas rules, and in the West Bank where Fatah holds sway.

Gaza has been blockaded by Israel and Egypt for three years and Hamas is blacklisted in the West as a terrorist group and has no normal access to funds as a recognised government. (Writing by Nidal al-Mughrabi; Editing by Ori Lewis and Jon Boyle) (For blogs and links on Israeli politics and other Israeli and Palestinian news, go to http://blogs.reuters.com/axismundi)