Ceremoniously announced last month, reconciliation between the two rival Palestinian leaderships — the secular Fatah and the Islamist Hamas — hit a serious snag Sunday, another sign that the effort is not going well.

In the latest blow, Hamas on Sunday rejected Fatah's proposal that internationally respected economist Salam Fayyad remain prime minister.

"Hamas will not agree to grant Salam Fayyad the confidence to run the national unity government," said Salah Bardawil, a Hamas official in the Gaza Strip.

The announcement boded poorly for a new round of unity talks set to begin this week.

Ironically, a breakdown in the reconciliation process could potentially bolster U.S. efforts to restart peace talks. Israel has balked at engaging a Palestinian government that includes Hamas militants and has urged the Palestinian Authority to abandon the attempt to draw closer to Hamas, and return to the negotiating table instead.

Fatah and Hamas have been at loggerheads since the Islamic militant group won parliamentary elections in 2006. A short-lived unity government disintegrated the next year, with Hamas overrunning the Gaza Strip. Since then, the Palestinian Authority, led by President Mahmoud Abbas of Fatah, has governed only in the West Bank.

Last month, the Palestinian rivals, unnerved by unrest sweeping the Arab world, announced plans to reconcile and form a caretaker government to prepare for elections next year.

For Abbas, who hopes to establish a state in both territories, the unity deal provides a way to claim to represent all Palestinians. For Hamas, the deal provides a way out of four years of international isolation.

Fearing Hamas participation could prompt the international community to cut off hundreds of millions of dollars in aid, they have committed to putting together a Cabinet comprised of apolitical technocrats.

Since a high-profile signing ceremony in Cairo on May 4, there has been little progress in the unity process.

Fayyad, a U.S.-educated economist and former official at the International Monetary Fund, enjoys the respect of the foreign donors. Abbas has determined that keeping Fayyad is the best way to ease concerns that donor money could fall into the hands of Hamas, which the West considers a terrorist group.

Fayyad is an independent, but Hamas sees him as a political figure who is close to the West.

Fatah and Hamas are set to meet on Tuesday in Cairo to begin the process of choosing a new Cabinet, beginning with the prime minister. It was not clear whether the Hamas announcement Sunday was a final decision or a bargaining tactic.

Both Amin Maqbol, a Fatah negotiator, and Osama Hamdan, a senior Hamas official, said the issue of government appointments should be worked out in closed negotiations, not through the media.

"Reconciliation is in its earliest stages and we should give it the opportunity to succeed," Hamdan said.

Fayyad's office declined comment.

The outcome of the negotiations could have deep implications for the stalled peace talks.

Differences over how to deal with Israel were at the heart of the breakup of the previous Palestinian unity government. Fatah favors peace with Israel, while Hamas rejects international demands to renounce violence and recognize Israel.

President Barack Obama has proposed that new peace talks should be based on the idea that Israel would withdraw from nearly all of the West Bank and east Jerusalem, with minor modifications to the final borders reached through negotiations. France has offered a similar plan.

In the absence of negotiations, the Palestinians say they plan to ask the United Nations to recognize their independence in September.

Netanyahu has rejected a return to the 1967 lines. But if Abbas ends the fledgling reconciliation with Hamas and agrees to drop his U.N. gambit, the Israeli leader could potentially be drawn to negotiations as well.

In a related development, Fatah on Sunday expelled Mohammed Dahlan, once the Fatah strongman in Gaza, blamed by many for Fatah's shock defeat by Hamas in the five-day 2007 conflict that left Hamas in control there. Dahlan has ,ong been accused of corruption, and recently he has been openly critical of Abbas.