CAIRO, April 27 (Marwa Awad/Reuters) - Palestinian President Mahmoud Abbas's Fateh group inked a deal on Wednesday with bitter rival Hamas to end their long-running feud and form an interim government ahead of elections within a year.

Israel said the accord, which was brokered in secrecy by Egypt, would not secure peace in the Middle East and urged Abbas to carry on shunning the Islamist movement, which has governed the Gaza Strip since 2007 after ousting Fateh in a civil war.

Forging Palestinian unity is regarded as crucial to reviving any prospect for an independent Palestinian state, but Western powers have always refused to deal with Hamas because of its refusal to recognize Israel and renounce violence.

We have agreed to form a government composed of independent figures that would start preparing for presidential and parliamentary elections, said Azzam al-Ahmad, the head of Fateh's negotiating team in Cairo.

Elections would be held in about eight months from now, he said, adding the Arab League would oversee the implementation of the agreement.

In the West Bank city of Ramallah, Abbas spokesman Nabil Abu Rdainah said the reconciliation was not Israel's concern.

Netanyahu must choose between a just peace with the united Palestinian people ... and settlements, Abu Rdaineh said.

At news conference in Cairo, where the Fateh and Hamas leaders sat side by side, Ahmad said Palestinians had paid a heavy price for their infighting.

We are proud that we now possess the national will to end our divisions so we can end the occupation of Palestine ... the last occupation in history.

Hamas' deputy leader, Moussa Abu Marzouk, added: Our rift gave the occupation a chance. Today we turn a new page.

Hamas won the last Palestinian legislative elections held in 2006 and a new ballot is months overdue. Israel is worried such a vote could hand Hamas control of the occupied West Bank, which is run by Abbas and his more secular supporters.

The Palestinian Authority must choose either peace with Israel or peace with Hamas. There is no possibility for peace with both, Netanyahu said in a televised statement.

The White House said Hamas was a terrorist organization and added that any Palestinian government would have to renounce violence. A US official said it would also have to respect past peace deals and recognize Israel's right to exist.

Both Hamas and Fatah, however, dismissed Netanyahu's ultimatum. Abu Mazen (Abbas) has said we want Hamas, Hamas is part of the Palestinian national fabric, Fatah's Ahmad said.

Hamas spokesman Taher al-Noono also said Israel was not concerned with Palestinian reconciliation and has been an impediment to it in the past.

MIDDLE EAST TURMOIL

The surprise accord came against the backdrop of tumult across the Middle East and followed the ousting in February of Egypt's President Hosni Mubarak, who was a close ally of the United States and had no patience for Hamas.

This agreement is possible because the Egyptian regime has changed. The new administration is taking a balanced position, said Hany al-Masri, a political commentator who took part in talks over the past two weeks that led to the breakthrough.

Analysts said the uprising in Syria, where part of Hamas's leadership is based, had also put pressure on the group to try to end its isolation in Gaza, a tiny coastal enclave that borders both Israel and Egypt.

Ordinary Palestinians have repeatedly urged their leaders to resolve their deep divisions, but analysts thought differences on core issues such as security were too wide to bridge, with Hamas and the Palestinian Authority running separate forces.

Mahmoud al-Zahar, a senior Hamas leader who participated in the talks, said Wednesday's deal covered five points, including combining security forces and forming a government made up of nationalist figures.

He said Hamas and Fateh would free respective prisoners.

Implementation of the accord is due to start following an official signing ceremony in Cairo, expected in early May.

Abbas is dependent on Western aid, which he has used to build up state institutions ahead of hoped-for independence.

Peace talks between Israel and the Palestine Liberation Organization broke down last year and Abbas has been pushing instead to obtain United Nations backing this September for an independent state on all areas Israel occupied in a 1967 war.

Netanyahu has criticized such a move and is expected to address a joint meeting of the US Congress during a visit to Washington next month where he plans to outline a plan to re-start the frozen negotiations.

While Fateh has supported the notion of a negotiated peace deal with Israel, Hamas has firmly rejected it and regularly fires missiles and mortars from Gaza into the Jewish state.

Our program does not include negotiations with Israel or recognizing it, Zahhar said in Cairo. It will not be possible for the interim national government to participate or bet on or work on the peace process with Israel.

Some Palestinian analysts called for caution over news of the reconciliation deal.

Previous experience has taught us not to rush into making a judgment, said analyst Hani Habib, who is based in Gaza.

We have had experiences in the past where agreements were fully signed, not just by initial letters, where governments were formed and then everything collapsed, he added.

(Reporting by Marwa Awad and Ayman Samir in Cairo, Tom Perry, Mohammed Assadi and Ali Sawafta in Ramallah, Nidal al-Mughrabi in Gaza and Ori Lewis in Jerusalem; writing by Sami Aboudi and Miral Fahmy; editing by Mark Heinrich/Maria Golovnina)