The Egyptian-mediated Palestinian reconciliation efforts are stuck and prospects for agreement appear distant, even if factions are scheduled to resume their negotiations in Cairo this month, according to sources close to the negotiations.

Last week, a second round of Palestinian unity talks was suspended without agreement and the potential for reconciliation appears to be fading fast. Egypt has prepared a new proposal that would formalise the current division between the rulers of the Gaza Strip and the West Bank, while Mahmoud Abbas, the Palestinian Authority president, is reported to be preparing to ask Salam Fayyad, the caretaker prime minister, to form a new government.

Representatives of the two main estranged factions, Fatah and Hamas, remain publicly optimistic that their differences can be reconciled. Nabil Shaath, a senior member of the Fatah delegation to the talks, said last week’s suspension should not be seen as a failure, but rather as a time for consultation.

“There are new creative proposals and each movement needs to consult its leadership,” he told the Al Jazeera satellite television network.

In Gaza, meanwhile, Ahmed Yousef, a senior Hamas official, said there was still a good chance that agreement could be reached.

“I believe that we can bridge the gaps when the factions meet again in Cairo in the next weeks.” Mr Yousef conceded that the first two rounds had not yielded any result, but said both factions were aware that now was an opportune time for Palestinians to show a united front, with what he said were signals that the United States was not opposed to Hamas participation in government.

Yet Washington still insists that the Islamic Resistance Movement accede to international demands that it recognise Israel, renounce its armed resistance and abide by previously signed agreements between Israel and the PLO, terms Hamas has so far rejected.

These terms have become a stumbling block in the Cairo talks.

“The two factions have reached a point where they cannot reconcile their differences on the political programme of a unity government,” one source close to the negotiations said.

“Hamas will not recognise international conditions and Fatah insists that it has to. They don’t seem to be able to reach a compromise. Neither party wants to make concessions, so there is deadlock.”

There had been some progress, said the source, who asked not to be named, but the two factions were at heart afraid that any agreement would dilute their control over their respective territories.

“If you control an area maybe you don’t want anybody to share. I think agreement now is a remote possibility.”

Ali Jarbawi, a political analyst and an independent delegate to the Cairo talks, said some progress had been made in the talks, in particular on the non-partisan composition of any unity government, and that the current conditions were propitious for Palestinian unity.

“With a unity government composed of independents we could tell the world that we have always been ready for agreement, while rejecting negotiations with the Netanyahu government as long as the settlement-building continues. That way, no one would have to accept any conditions.”

Nevertheless, an Egyptian proposal that Palestinians continue with two governments, one in the West Bank under Mr Abbas and one in Gaza, led by Hamas, and set up a committee to co-ordinate between the two, was a signal that Cairo is preparing itself for the failure of the process, Mr Jarbawi said.

Reports that Mr Abbas intends to ask Mr Fayyad, who has continued in his post as caretaker prime minister in spite of resigning early last month, also suggest that talks have reached a dead end.

Mr Fayyad had originally said he would step down at the end of March or at the successful conclusion of reconciliation talks, whichever came first, but he has backed down from that position and there has been no sign that an alternative cabinet is being formed in preparation.

Should Mr Abbas ask Mr Fayyad to form a new emergency government it would most likely cause a third round of unity negotiations to be called off.

Mr Yousef said a national unity government would be the best solution to reconcile Palestinians and prepare for new elections.

As for Mr Abbas appointing a new caretaker government, Mr Yousef said it would be counterproductive. “Such a move would complicate the situation and probably push Gaza to reciprocate. This would leave us going nowhere.”