On Wednesday, Egypt announced that Fatah and Hamas, the rival Palestinian parties, had agreed a “reconciliation deal” whereby they will form an interim unity government and fix a date for elections following further talks in Cairo.

While Egypt has long been trying to broker a deal, its ability to get an agreement is part of the new military-sponsored government’s fundamental realignment of foreign policy, centring on relations with Iran. Cairo’s immediate aim is to gain leverage over Israel via the Palestinians, but the shift threatens to disrupt relations not only with Israel itself, but with the United States and the Gulf monarchies.

The announcement was met with overt hostility by Tel Aviv and Washington.

Israeli Prime Minister Benjamin Netanyahu refused to accept Hamas as a negotiating partner and demanded that Abbas “choose between peace with Israel or peace with Hamas”. “There is no possibility for peace with both,” he said, adding that the agreement “exposes the Palestinian Authority's weakness”.

Foreign Secretary Avigdor Lieberman said the deal marked the “crossing of a red line”.

“We have at our disposal a vast arsenal of measures including the lifting of VIP status for Abu Mazen [President Mahmoud Abbas] and [Prime Minister] Salam Fayyad, which will not allow them to move freely,” he threatened. “We could also freeze the transfer of taxes collected by Israel for the Palestinian Authority.”

The White House supported Israel’s stance, insisting that Hamas was a “terrorist organisation.”

Under the agreement, Fatah and Hamas, which rule over the West Bank and Gaza respectively, will form an interim government made up of “independent” politicians chosen by both parties. They will fix a date and prepare for the election of a president and legislative assembly within a year. The Palestine Liberation Organisation (PLO) will be restructured to allow Hamas to join it, and all political detainees held by the two parties will be released.

The draft agreement was agreed by Moussa Abu Marzouk, deputy head of Hamas’ politburo, and Azzam al-Ahmad, a Fatah central committee member. The final agreement is due to be signed in Cairo next week by both sides in the presence of Fatah’s Mahmoud Abbas, the acting president of the Palestinian Authority, and Khaled Murshal, the Hamas leader based in Damascus.

Abbas admitted to being taken by surprise by Hamas’ acceptance, saying that many details about its implementation had still to be worked out. Indeed, despite all the talk of “reconciliation”, there are already different views as to what was agreed and relations between the two parties remain fraught.

Hamas’ participation in the interim government is not predicated upon its acceptance of the three conditions imposed by Tel Aviv, Washington and the European Union: that it accept the 1993 Oslo Accords, renounce violence and recognise Israel’s right to exist. But Abbas stressed that Hamas would not be represented in the new government, saying, “These people will be independent, technocrats, not affiliated with any factions, neither Fatah nor Hamas.”

He sought to reassure Israel by indicating that the Palestinian Authority would not release Hamas prisoners detained on weapons charges or allow Hamas militias to operate in the West Bank.

The PLO intends to retain its role as the sole negotiator with Israel. Speaking at a press conference in Ramallah, Abbas made clear that should “peace talks” go ahead with Israel in the next year the PLO and not the interim government would be responsible for “handling politics, negotiations”.

“This government is authorised to do two things: fix a date for the elections and rebuild Gaza. Politics is for the PLO and we will continue to follow my policies,” he said.

Mahmud Zahar, a senior Hamas official, said while his party had no plans to talk to Israel, it would not stop Abbas and Fatah from doing so. He told the AFP news agency in Cairo, “If Fatah wants to bear the responsibility for negotiating on nonsense, let it. If it manages to get a state, good for them.”

Hamas and Fatah have been bitter political rivals for years, coming close to all out civil war, with Hamas refusing to recognize Israel. When Hamas won the Palestinian elections in January 2006, it was branded as a terrorist entity by Tel Aviv and Washington and subjected to economic sanctions. In June 2007, it took power in Gaza to forestall a coup led by Fatah and planned by Israel and the US.

But Hamas’ perspective of an Islamic capitalist state was no more able to provide a viable, let alone progressive way forward than Fatah’s secular capitalist state.

It is entirely dependent upon external support—from Saudi Arabia, Egypt, Jordan and latterly Iran and Syria. This has ultimately determined its realignment with the Abbas regime on the West Bank.

As the leaked Palestine Papers revealed, Fatah equated the “rule of law” with eliminating Hamas and all opposition to Israel by arresting, detaining and torturing suspected Hamas supporters. It supported Israel’s murderous assault on Gaza in December 2008 to eradicate Hamas.

Yet Fatah’s acquiescence yielded only contempt from Washington and Tel Aviv, which had no intention of creating a viable Palestinian state. The revelations served to destroy what little remained of Abbas’ and Fatah’s credibility—making them receptive to the diplomatic moves by Egypt. Last month, Abbas said he was ready to go to Gaza and meet Ismail Haniya, the Hamas leader, who had already called for unity talks.

For years, former Egyptian President Hosni Mubarak did everything he could to contain Hamas, an offshoot of the Muslim Brotherhood, while playing a key role in maintaining Israel’s blockade of Gaza and supporting its targeted assassinations and aerial bombardment of the defenceless Palestinian people. To this end, he had sought to broker a deal between Fatah and Hamas that would subordinate Hamas to Fatah.

However, Egypt’s new government is anxious to distance itself from some of Mubarak’s unpopular policies, particularly his open subservience to Washington regarding Israel and the Palestinians. It is seeking to boost its own credibility at home and restore Egypt’s position in the region to more effectively pursue its own interests. To this end it has already made an accommodation to the Muslim Brotherhood at home and is now extending this shift to its relations with Hamas and, far more importantly, to Iran.

Menha Bakhoum, spokesperson for the Foreign Ministry, explained, “We are opening a new page”. “Egypt is resuming its role that was once abdicated,” she continued.

Diplomatic relations with Tehran, terminated in 1979 when Egypt provided a sanctuary for the Shah, are to be resumed. The government has invited Iran’s foreign minister to Cairo, while Iran is reported to be considering reopening its embassy in Cairo. A few weeks ago, Cairo allowed two Iranian warships through the Suez Canal, much to the anger of Tel Aviv and Washington. Tehran announced new arrangements to increase tourism between the two countries.

“All the world has diplomatic relations with Iran with the exception of the United States and Israel,” Bakhoum said. “We look at Iran as a neighbour in the region that we should have normal relations with. Iran is not perceived as an enemy as it was under the previous regime, and it is not perceived as a friend.”

Having brought the Muslim Brotherhood in from the cold, the path was clear for warmer relations with Hamas, which receives funding from Tehran and Damascus. The new government invited Hamas to meet senior officials in an effort to bring it on board.

Hamas faces the same social pressures that swept away Tunisia’s Ben Ali and Egypt’s Mubarak, leading to demonstrations by thousands in Gaza that it forcibly suppressed—with some centering on appeals for unity with the PLO. Under conditions where the Assad regime in Syria, its host and sponsor, faces unrest at home and international pressure abroad, and taking its cue from Tehran, it was more than happy to sign a deal with Fatah in return for better relations with Egypt.

The military regime in Cairo also sees an opportunity to strengthen its negotiating hand against Israel. Bakhoum said that while Egypt would honour all its commitments, including its 1979 Camp David Agreement with Israel, it would open up the border with Gaza “completely”—adding that Israel’s blockade and Egypt’s enforcement of it were “shameful”.

Iran’s Foreign Minister Ali Akbar Salehi has said he “welcomed” the deal and praised the Egyptian government for moving towards a rapprochement between the two countries. “This is the first triumph of the great Egyptian people concerning Palestine after the developments in Egypt, and the effort of Egyptian government is appreciated,” he said.