Hamas said on Wednesday it would demand the right to choose the next Palestinian prime minister and a majority of Cabinet seats in any unity government with Palestinian President Mahmoud Abbas' secular Fateh faction.

Hamas' opening position in Egyptian-mediated reconciliation talks in Cairo appeared to dim chances of a deal on a unity government acceptable to the United States and other Western powers, which shun the Islamist group for refusing to recognise Israel and renounce violence.

Hamas official Mushir Al Masri said any new government must be formed in light of the results of the 2006 parliamentary elections, which gave Hamas the majority and which, he said, should allow the Islamist group to form the government and pick the prime minister.

"Such democracy must be the base upon which any new Palestinian government can be formed," Masri said.

Abbas had called for forming a government of non-partisan technocrats who would oversee Gaza's reconstruction from Israel's 22-day offensive in December and January and lay the ground for new Palestinian presidential and legislative elections.

Hamas also ruled out on Wednesday accepting a unity government headed by Abbas' Western-backed prime minister, Salam Fayyad. Abbas appointed Fayyad and his government in the occupied West Bank after Hamas seized control of the Gaza Strip in 2007.

Youssef Rizqa, the political adviser of the current Hamas Prime Minister in Gaza Ismail Haniyeh, sacked by Abbas in 2007, said the group was "fully committed" to its right to choose the coming prime minister of the intended unity government.

"We will never accept Fayyad not only because he committed crimes against the Palestinian people and against resistance in the West Bank but also because Fateh and Abbas cannot legally nominate the candidate" for prime minister, Rizqa said in a statement posted on a pro-Hamas website.

On Saturday, Fayyad said he intended to resign by the end of March to pave the way for the formation of a unity Cabinet.

Abbas asked him to remain in office until results emerged from the talks in Cairo.

Hamas spokesman Fawzi Barhoum said the fate of Hamas prisoners in jails in the West Bank "continued to lay a shadow" over committees formed to tackle issues at the heart of reconciliation.

"Hamas stressed to the Fateh delegation the need to remove all obstacles and to end the file of political detention in the West Bank," Barhoum said.

He said discussions were under way to reach a "package deal" over all issues of dispute among the factions.

High-level meeting

Top EU officials will meet this weekend with foreign ministers from Egypt and the Palestinian territories and a representative from Jordan, the bloc's Czech presidency announced Wednesday.

"Czech Foreign Minister Karel Schwarzenberg has called another meeting on the current developments in the Middle East, to take place on March 15 in Brussels," said a statement.

The EU will be represented by Schwarzenberg, EU foreign policy chief Javier Solana, External Relations Commissioner Benita Ferrero-Waldner, and an official from sweden, which takes over the EU presidency from Prague in July.

"The objective of the dinner meeting is particularly the discussion of the current situation in Palestine and the role of Egypt in mediating the Middle East negotiations," the statement said.

Prisoner swap

Egypt hosted closed-door talks on Wednesday on a prisoner swap between Hamas and Israel that would set free soldier Gilad Shalit along with hundreds of Palestinians.

For a third time in two weeks, Israeli negotiator Ofer Dekel returned to Cairo on Tuesday night in an effort to nail down the elusive deal, which could pave the way for a long-term truce for the Gaza Strip.

"Intensive and tough negotiations are under way on the names of the Hamas prisoners to be traded for Shalit," a source close to the talks told AFP, asking not to be named.

Dekel "is now expected to spend a second night in Egypt and will pursue talks, in an apparent sign that things are moving", the source said later on Wednesday.

He said the two sides were in a race against the clock to seal a deal before an April 3 deadline for Israeli right-wing hardliner and prime minister-designate Benjamin Netanyahu to form a new government.

Israel has insisted that any agreement for a lasting ceasefire in and around the Hamas-ruled Gaza Strip depends on the release of Shalit, who was captured by Palestinian fighters in June 2006.

Galloway meets Haniyeh

British lawmaker George Galloway has held a meeting with Gaza's Hamas prime minister at an undisclosed location.

Haniyeh has kept out of sight since Israel launched a devastating military offensive on Gaza last December.

Haniyeh's office said the meeting took place on Tuesday.

It released a picture of the two men embracing and says Galloway was awarded an honorary Palestinian passport. Galloway left Gaza on Wednesday through the Egyptian border.

Israel politics

Netanyahu wants to form a government by the end of next week, a senior official in his hawkish Likud Party said on Wednesday.

"Netanyahu wants to wrap up the coalition talks by next Wednesday and does not wish to ask President Shimon Peres for a two-week extension," the official told AFP on condition of anonymity.

Netanyahu was tasked on February 20 with forming a government after the February 10 election and has an initial deadline of March 20 but can seek a two-week extension to April 3.

Palestinian shot dead

A teenager was shot dead and another Palestinian wounded in a clash with Israeli soldiers near Ramallah in the occupied West Bank on Wednesday, Palestinian officials and the Israeli army said.

Fayez Ata, 17, was among a group of Palestinians who threw stones at the soldiers while they were conducting an operation, prompting them to open fire, the Palestinian security officials said.

They added that the wounded Palestinian was evacuated into Israeli territory for treatment.

A spokeswoman for the Israeli army said a group of Palestinians threw Molotov cocktails at army vehicles, setting one on fire.

The soldiers descended from their vehicles and issued warning shots before opening fire, killing one Palestinian, she said.