At least seven Palestinians were shot dead and scores more were injured yesterday as Hamas forces opened fire during a rally in Gaza City organised by the rival Fatah movement to commemorate the anniversary of Yasser Arafat's death

Three years after the former president died in a Paris hospital – and almost six months after Hamas's bloody takeover of Gaza – an estimated 200,000 to 250,000 people took part in one of the largest political rallies held in the Palestinian territories in recent memory.

But it ended in pandemonium after 90 minutes when some Fatah supporters threw stones at Hamas personnel, members of the Hamas executive force appointed by the de facto government to police Gaza shot at demonstrators, and thousands of others who had taken part in the peaceful rally scrambled for cover.

The bloody end to the gathering, only weeks before a planned US-hosted summit aims to restart the peace process, was a stark reminder of the deep divisions between the two Palestinian regimes – the internationally backed emergency government under the Fatah Palestinian President Mahmoud Abbas and Hamas, enforcing its grip over a Gaza which has become more impoverished and isolated because of the boycott by Israel and the global community.

Hamas claimed yesterday's bloodshed was triggered by Fatah gunmen who opened fire from the nearby Al Azhar University. But this was strongly denied by Fatah, which said that all those killed were its own supporters. "Why would Fatah call a rally and then ruin it?" asked Ahmed Hilles, the senior Fatah official left in Gaza after last June's bloody in-fighting, who gave a keynote speech at the rally.

Sami Abu Zuhri, a senior Hamas spokesman, said four Hamas police officers were hurt. Some witnesses suggested the Hamas forces were provoked by the chants of "Shia, Shia" which rang out from the crowd, many of them waving yellow Fatah flags, in derision at what Hamas opponents see as the faction's increasing dependence on Iran.

Either way, a group of demonstrators in the crowd could be seen carrying the blood-stained

body of a comrade, draped in the black and white chequered scarf favoured by Fatah supporters.

As hundreds of demonstrators fled down a street near the rally site, with sporadic gunfire still ringing out behind them, a frightened woman stood by a wall with a small boy begging a passing taxi driver for a lift. Kefaya Zigara, 40, from the Beach refugee camp, said she had gone to look for her son, Abed, who wanted to see the rally. "I will have to go home and wait for him," she said. "I have no other option. I blame Hamas for this. Why did they have to be there, they should have left it alone."

Dr Walid abu Ramadan, the medical director at the Al Quds hospital, said that apart from a few women suffering from hysteria and shock, almost all the 40 injured had bullet wounds. Nearby, Taher Nasser, 20, was lying on a stretcher as a friend held a drip for him. He said: "We were shouting 'Abu Ammar, Abu Ammar' [Yasser Arafat's nom de guerre] and Hamas started throwing sound grenades. Then I got shot in the back. They were shooting from the Islamic University."

After most of the crowd had dispersed, the main junction of Arab League Street and 30th Street, close to the mosque, was littered with stones hurled by demonstrators. Fatah supporters at the hospital said the stone-throwing had started only after the shooting began, but a Hamas policeman at the scene said it began before any shots were fired.

Khaled al Nouri, 18, his head heavily bandaged, took refuge from the gunfire in the electoral commission building. He said: "When I came out, a policeman hit me. I said, 'Why are you hitting me? I have no AK-47.' But he got other policemen and they hit me again. I am not Fatah and Hamas. I just went to support my president who died three years ago. I liked him."

Ihab Ghusain, a spokesman for the Hamas-controlled Interior Ministry, said gunfire by Fatah militants started the shooting and led to firing "from all sides". He claimed Fatah had deliberately tried to "create chaos" and revive the factional fighting of last June. He added: " Everyone knows the police were there to keep order and to ensure people could easily attend the rally. Our brothers in Fatah have to take responsibility for what happened."

Hazar Abed, a doctor at Shifa Hospital, said a total of 130 people had been injured – 12 of them seriously.

Mr Hilles said: "The world has seen something different. It has seemed unarmed people being chased by armed people."

He claimed that, during the past 48 hours, Hamas forces had followed Fatah officials, confiscated loudspeaker vehicles intended to encourage Fatah supporters to attend, and warned some bus operators against ferrying demonstrators to the rally. Instead, tens of thousands of people from all over Gaza arrived in trucks, private cars and taxis and donkey carts for the event – the biggest rally in Gaza since Yasser Arafat returned in triumph from Tunis in 1994. Mr Hilles added: "This was not a mistake. It was something that was meant to happen by Hamas. We felt there was a will to ruin the rally."

However, he said Fatah would not seek revenge and added: "This should be a lesson for Hamas and not for Fatah. It should benefit from its mistake. If there is a way to end the bloodshed we will not hesitate. But is there anyone on the other side who understands this?"

A lengthy and angry statement from Mr Abbas's office said the day's " bloody events" left "no space for doubts that the coup and those behind it are not going to last". It added: "Our dignified people are capable of resisting the dictatorship of Hamas's heinous regime, and to foil and bring down those who led the coup and protect the national project."

The fighting broke out after the main speeches and as some had begun to leave the rally. Although the event was billed to start at 1pm, the organisers decided to bring it forward to about 11.30am because of the large crowds which had already assembled by 9am.

Abu Zuhri, a Hamas spokesman, said Fatah was to blame for the day's " deaths and crimes" and repeated claims that Fatah gunmen had been posted on nearby high buildings as a provocation.

As Fatah spokesmen in Ramallah queued up to denounce the conduct of Hamas, the Fatah official Mohammed Dahlan declared that the demonstrators had been saying "no" to Hamas and added: "I call on Fatah in Gaza to continue pursuing peaceful means in confronting Hamas."

By last night, most Hamas security personnel, who had earlier manned checkpoints across Gaza and patrolled many of its streets, had withdrawn from public view after reportedly detaining 27 Fatah organisers. One witness told the Associated Press news agency that he saw 10 Fatah gunmen being turned away at the beginning of the rally by Hamas security personnel, despite Fatah's insistence that no armed men were at the rally.

On the one hand, the high turnout – which appeared to have exceeded the expectations of the Fatah organisers, many of whom are still being paid by President Abbas's emergency government – will boost hopes harboured by some observers in the international community that Hamas is losing popularity.

On the other hand, the response of Hamas forces may suggest that their strong paramilitary control of the streets and show of force yesterday will act as a deterrent to any possible uprising by their opponents in the Gaza Strip.