Abbas, returning to the Middle East from New York, where he met with US President George W. Bush, criticised "retractions" by Hamas leaders after they had agreed to form a national unity government.

"We had concluded an agreement for the formation of a government of national unity based on several points, among which in particular was to respect all of the agreements reached by the PLO (Palestine Liberation Organisation) and (to respect) the Arab peace initiative," Abbas said.

"We unfortunately returned to zero and we will negotiate again" with Hamas, he said after holding talks in Cairo with Egyptian President Hosni Mubarak.

Hamas had agreed with Abbas earlier this month to form a national unity government, raising hopes the movement may finally agree to Western demands to renounce violence, recognize Israel and abide peace deals.

But on Friday, Hamas insisted a unity government would not recognise Israel and proposed a 10-year truce that was promptly rejected by the Jewish state.

The United States is emphatic that the three conditions must be met before a virtual international blockade on funds to the Palestinian Authority is lifted.

"The only way forward is to have a Palestinian Authority government ... that adopts the conditions laid out by the Quartet (the European Union, Russia, United Nations and the US) previously back in January," US State Department deputy spokesman Tom Casey said Friday.

In comments reported by the Egyptian news agency MENA, Abbas invited Hamas to reconsider its position in the interests of the Palestinian people who were suffering from the suspension of international financial assistance.

"The situation of the Palestinian people is clear -- civil servants have been striking for four weeks, there is a blockade on Palestinian territories and any responsible person must take this into consideration," said Abbas.

Earlier more than 1,000 Palestinian officials demonstrated peacefully outside the office of Palestinian Authority President Mahmud Abbas Saturday to demand payment of salary arrears.

The protest coincided with the start of the holy month of Ramadan in the Palestinian territories during which Muslims traditionally try to buy small gifts and new clothes for children and meet for meals with family after a day of fasting and abstinence.

The protestors marched from the Palestinian parliament to Abbas's office to call for payment.

The Palestinian Authority is suffering from severe financial problems because international donors suspended aid when Hamas -- viewed as a terrorist body by the United States and European Union -- won democratic elections and formed the Palestinian government last March.

The authority's 160,000 civil servants have only received part of their salaries since March and help for the unemployed has also not been paid. More than half the population of Gaza is out of work.

Both Washington and the European Union demand Hamas recognise Israel, abide by Palestinian accords signed with the Jewish state, and renounce violence. Hamas refuses to accept the demands.