(Adds Abbas, Erekat comments)

By Mohammed Assadi

RAMALLAH, West Bank, Oct 11 (Reuters) - Palestinian President Mahmoud Abbas of Fatah ruled out talks with Hamas on Thursday as Israel warned that dialogue with the Islamists could torpedo a peace deal with the Jewish state.

Palestinian sources familiar with the matter said members of Hamas and Fatah had discussed holding peace talks, but Abbas said he did not support a meeting and rejected dialogue with Hamas unless it gave up control of the Gaza Strip.

Hamas seized the coastal territory in fighting with Fatah forces in June.

"All that has been reported on the news or in rumours are unfounded," Abbas was quoted as saying by the official Palestinian news agency.

Abbas said that until Hamas Islamists "rectify their mistakes ... we will not accept any dialogue".

Abbas dismissed the Hamas-led Palestinian government after the violence in Gaza, leading to an easing of U.S. and Israeli sanctions and plans for a peace conference next month.

Ismail Haniyeh, Hamas prime minister until June, said late on Wednesday his group was ready to hold talks with Fatah and hinted it might be ready to give up control of the enclave.

Israel, which is trying to bolster Abbas and sideline the Islamist group, said talks between the rival factions could torpedo efforts ahead of a U.S.-sponsored conference on Palestinian statehood.

"We are concerned that if you ... allow this extreme organisation which is opposed to reconciliation back to centre stage you will, in fact, torpedo any chance of moving forward," Israel's Foreign Ministry spokesman Mark Regev said.

Israel and the West have shunned Hamas until it recognises the Jewish state's right to exist.

END GAME AGREEMENT

In an interview with Israeli Channel 10 television, senior Abbas aide Saeb Erekat left open the possibility that Abbas would step down if the Middle East peace conference failed to produce an agreement.

"When I say that Abu Mazen (Abbas) is not glued to his chair, I really mean it. It's not that he doesn't want to serve his people, but failure to produce an agreement will change the dynamics of thinking and thought within the Palestinian society," Erekat said.

Erekat acknowledged that Fatah was not strong enough to retake control of Gaza by force, but said "if an end game agreement is reached ... Hamas is over the same day in Gaza without a single shot". Fatah leaders rejected Haniyeh's calls for talks and said Hamas, struggling with the effects of an international boycott and an Israeli blockade of Gaza, was lying about wanting peace so as to shore up Palestinian support. Palestinian sources familiar with the talks but not affiliated with either party said on Thursday Fatah official Jibril al-Rajoub met senior Hamas official Mohammed Nazzal to discuss holding talks in Egypt.

A Fatah official said on Thursday the meeting between Rajoub and Nazzal was "non-binding" and Rajoub, a one-time senior Fatah security official who has been pushing for talks with Hamas, did not have the backing of Fatah leadership.

Rajoub declined to comment on the record.

"With the international restrictions on Hamas, they have started to feel the crunch," the official said.

One source close to the talks said an exiled hardline Hamas leader would arrive in Cairo next week to prepare for talks between the factions.

Fatah refuses to talk to Hamas unless it pulls out of its security compounds in Gaza. Hamas says ceding control of the compounds must come as part of a deal, not as a precondition.

(Additional reporting by Nidal al-Mughrabi in Gaza and Ali Sawafta in Ramallah)

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