In an effort to end months of deadly conflict and aid boycott by the West, Palestine's Hamas-led government has resigned to pave the way for rival Fatah to join the administration under a new power-sharing pact that the United States threatened to reject if it refused to recognise Israel's right to exist.

Prime Minister Ismail Haniya's Hamas-led government stepped down to start the constitutional process of forming a 'national union' with rival Fatah movement and President Mahmud Abbas charged him with forming the new cabinet.

"Today, we started the procedure of forming a government of national union. Brother Ismail Haniya presented me with his government's resignation and I charged him with forming his new cabinet," President Abbas, who heads the moderate Fatah party, told media persons on Thursday after talks with Haniya.

"As head of the current government I submit my resignation to you in order to allow the start of constitutional steps to form a unity government," Haniya said.      

The national unity government that will replace the Hamas will 'inaugurate a new Palestinian era in which people live in peace and security,' the leaders hoped.

"I call upon you as head of the next government to abide by the interests of the Palestinian people and to preserve their rights and accomplishments and work to achieve their national goals," Abbas said.

"I call upon you to respect Arab and international resolutions, and the agreements signed by the Palestine Liberation Organisation," he said.

The United States indicated that it will not recognise the future national unity government if it refuses to recognize Israel and abide by past peace deals.  

"Our conditions always remain the same," White House spokesman Tony Snow said after the Palestinian government resigned.

"You want a two state solution, the Palestinans deserve a state, they deserve a state living side by side in peace with Israel," Snow told media persons.

"Israel needs a negotiating partner that acknowledges Israel's right to exist, renounces the use of violence against Israel and also abide by previous international agreements involving the Palestinians and Israel," he said.

"Those are the basic conditions and we certainly hope that Israel will find that partner we have worked with president Abbas and we continue to do what we can," said Snow.

The Hamas government was boycotted by Israel and the Western nations soon after it came to power in March 2006 due to its refusal to recognise Israel, shun violence or abide by past peace agreements. Abbas and Hamas chief Khaled Meshaal signed the power-sharing agreement in Saudi Arabia on Feb 8 to end the deadly violence that has left 100 people dead.