By Jeffrey Heller

JERUSALEM, March 10 (Reuters) - Israel and Palestinian militants in the Gaza Strip have been holding off from violence that could jeopardise Egyptian efforts to mediate a ceasefire, sources from both sides said on Monday.

A truce deal may be key to U.S.-brokered peace efforts and also benefit Hamas Islamists who control the Gaza Strip and oppose the statehood negotiations between Israel and Palestinian President Mahmoud Abbas of the secular Fatah group.

The number of Palestinian rocket attacks on southern Israel has dropped sharply since Prime Minister Ehud Olmert said on Wednesday that Israeli forces would have no reason to attack the Hamas-controlled Gaza Strip if the daily salvoes stopped.

Israel has not struck in the territory since Thursday.

And while Israeli and Hamas officials made clear no formal ceasefire had been reached, an Israeli political source said on Monday there had been "an exchange of ideas" between the two sides via Egyptian mediators. The source did not elaborate.

The uneasy lull, which Israeli Army Radio attributed to "quiet understandings", follows a five-day Israeli offensive in the Gaza Strip that killed 120 Palestinians, about half of whom were identified as civilians by the time it ended a week ago.

The violence had threatened to derail U.S.-brokered peace talks. In protest at the bloodshed, Abbas briefly suspended negotiations. They are due to resume later this week.

Amid much scepticism, Washington has said it hopes to achieve a deal before year's end on Palestinian statehood.

The political source said Olmert is keen to calm violence with Hamas so that talks with Abbas can make progress and enable him to present a viable peace platform to voters should the statehood moves force a new Israeli election.

For Hamas, a ceasefire would be particularly attractive if it included an easing of an Israeli-led blockade of the Gaza Strip.

Israeli generals, however, are concerned that Hamas might take advantage of any lull or truce to regroup and rearm following last week's punishing Israeli offensive.

ROCKETS

Over the past three days, Gaza militants from various factions have launched four rockets and 10 mortar bombs across the frontier, the Israeli military said.

The sharp cutback, from about 10 to 15 rockets a day a week earlier, followed a visit by U.S. Secretary of State Condoleezza Rice to Israel and the occupied West Bank in which she appealed for calm.

Israel last carried out an air strike on Thursday.

"If rockets are not launched from Gaza into Israeli cities, there will be no reason to respond," said an Olmert spokesman, asked about the current lull.

Hamas's armed wing has not itself claimed responsibility for firing any rockets into Israel since last Monday.

In the absence of Israeli "aggression", Hamas official Sami Abu Zuhri said, the group had no cause to launch rocket attacks.

Khaled al-Batsh, a senior leader of Islamic Jihad which is allied to Hamas in Gaza, said "the lull in rocket-firing has to do with the situation on the ground and the reduction in Zionist attacks".

Both groups said Egyptian-mediated truce talks would continue.

Egypt held inconclusive meetings on Thursday with Hamas and Islamic Jihad leaders, part of a U.S.-backed push for a truce between the groups and Israel. A senior Israeli defence official, Amos Gilad, visited Cairo over the weekend.

Hamas and Islamic Jihad leaders said after the session they would study an Egyptian proposal but were non-commital. (Additional reporting by Alastair Macdonald and Avida Landau in Jerusalem and Nidal al-Mughrabi in Gaza, Editing by Samia Nakhoul

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