(Adds Olmert may free frozen tax revenues, paragraph 16)

By Wafa Amr

RAMALLAH, West Bank, June 5 (Reuters) - Marking 40 years of Israeli occupation, President Mahmoud Abbas said on Tuesday internal fighting had brought Palestinians to the brink of civil war.

Yet Abbas, recalling what he described as the Arabs' "great defeat" by Israel in six days of war that began on June 5, 1967, assured his people that statehood was within reach.

"On the internal front, the cause of everybody's concern is what is called the security chaos, or more precisely, standing on the brink of a civil war," Abbas said in a televised speech from the city of Ramallah, in the occupied West Bank.

The danger posed by factional violence -- in which some 50 Palestinians were killed in recent weeks -- was equal to and sometimes exceeded the "danger of occupation", he said, citing Israeli military attacks that have caused casualties.

In the Gaza Strip, forces from Abbas's Fatah faction and Islamist Hamas fought a three-hour gun battle near the Karni commercial crossing, the most serious flare-up in violence between the two groups in two weeks.

One member of Abbas's Presidential Guard was wounded.

A Hamas source said the group's gunmen had been in the area to monitor Israeli forces near the Gaza border when they came under fire from the Presidential Guard.

Hamas, which formed a unity government with Fatah in March, denied any casualties on its side. But a senior Western security source said several Hamas members had been wounded and accused the group of hiding its casualties.

SETBACK

In Ramallah's main square, down the road from an Israeli army checkpoint at the city's entrance, Palestinians gathered for a rally to mark the "naksa", or setback, of 1967.

The Six Day War, preceded by Egypt's closing of Israel's access to a key Red Sea shipping lane, began with Israeli air raids that destroyed the bulk of the Egyptian air force.

It ended with Israel occupying the West Bank -- including Arab East Jerusalem -- the Gaza Strip, Golan Heights and Sinai desert.

"Since that black date, our people and nation are paying a dear price for a great defeat that ... added complications to the Israeli-Arab conflict, at the heart of which is the Palestinian problem and the rights of our people," said Abbas.

"Despite all the difficulties, we are taking steps towards statehood, a target that is getting closer," he said.

Abbas said he and Israeli Prime Minister Ehud Olmert would meet for talks in a few days inside Palestinian territory.

"If the Israelis prefer to limit the agenda to the bare minimum, it is my duty as the elected president of the Palestinian people to discuss strongly all issues and to press that they be placed on the agenda," said Abbas.

Israeli sources said Olmert, under U.S. and European pressure to help bolster Abbas in a power struggle with Hamas, may agree to transfer to the Palestinian president more than $300 million in tax revenues Israel has withheld from the Palestinians.

The Jewish state froze the tax revenues after Hamas won power in elections last year.

Olmert's office said Egyptian President Hosni Mubarak telephoned the prime minister to discuss bilateral issues and how to move forward towards Israeli-Palestinian peace.

Egypt signed a peace treaty with Israel in 1979 under which it regained the Sinai. (Additional reporting by Ali Sawafta, Nidal al-Mughrabi in Gaza and Adam Entous in Jerusalem)

AlertNet news is provided by