By Nidal al-Mughrabi

GAZA, Nov 10 (Reuters) - Palestinian Prime Minister Ismail Haniyeh hinted on Friday he would step aside and not head a unity government Hamas is trying to forge with the Fatah faction as a way to lift a Western embargo.

Haniyeh said he hoped the unity cabinet could be in place within three weeks, ending months of intermittent talks and internal violence that has raised fears of civil war.

The prime minister, a senior Hamas leader, told worshippers at a mosque in the Gaza Strip that Western powers did not want him to be part of the new administration.

"(They have) one condition, that the siege will not be lifted unless the prime minister is changed.

"When the issue is like this, the siege on one hand, the prime minister on the another ... I prefer the siege be lifted and the suffering ended," Haniyeh said.

The United States and Europe imposed crippling sanctions on the Palestinian Authority when Hamas took power in March because of the group's refusal to recognise Israel and renounce violence. Israel also withheld tax and customs receipts.

Palestinian officials said this week Haniyeh would not be part of the unity cabinet. They said Haniyeh had given President Mahmoud Abbas of Fatah the names of several people to succeed him, although Haniyeh denied doing so.

Until now, Haniyeh has made little comment on his political future.

Haniyeh said dialogue with Fatah and other parties would resume next week after talks were suspended in the wake of the Israeli artillery shelling of Beit Hanoun in northern Gaza on Wednesday that killed 18 civilians.

"We have laid down the rules and the basis for the formation of a national unity government. I hope that within two to three weeks this issue will be concluded," Haniyeh said.

Palestinian leaders hope the formation of a unity government, partly made up of professional experts, can lead to a resumption of direct foreign aid to the Palestinian Authority.

But Hamas insists it will never recognise Israel or join a government that does, making it unclear how a unity cabinet could meet international demands to soften its line.

While Haniyeh spoke of one condition, the United States and Israel have said the Palestinian government had to recognise the Jewish state, renounce violence and accept interim peace deals.

The sanctions have deepened economic hardship in the occupied West Bank and in Gaza.

Hamas, which advocates Israel's destruction, took office after trouncing the once-dominant Fatah in January elections.

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