By Nidal al-Mughrabi

GAZA, Nov 12 (Reuters) - Hamas and the rival Fatah faction opened talks on Sunday on allocating cabinet seats in a unity government that Palestinians hope will lead to the easing of Western sanctions, officials said.

Prime Minister Ismail Haniyeh of Hamas and President Mahmoud Abbas of Fatah have both said they hope a new cabinet can be formed within two to three weeks, ending months of intermittent talks and internal violence that have raised fears of civil war.

"All members of the new cabinet must have two features. They must be honest and qualified," said Ismail Rudwan, a spokesman for the Hamas Islamist movement.

Senior leaders from the two sides began talks in Haniyeh's office in the Gaza Strip, witnesses said. The discussions are expected to last several days.

Hamas took office in March after winning elections in January, stunning the long-dominant and more moderate Fatah.

But Hamas has struggled to govern under sanctions imposed by the United States and Europe because of the group's refusal to recognise Israel. It has also been locked in a bitter power struggle with Abbas, who was elected separately in early 2005.

The opening of the Palestinian talks coincided with the arrival in Washington of Israeli Prime Minister Ehud Olmert for talks with U.S. President George W. Bush on Monday. The Israeli-Palestinian conflict will be high on the agenda.

Olmert praised Abbas last week, calling him "upfront, decent and against terror", in an apparent signal that he would be the focus of any new U.S. or Israeli peace effort.

MANY DIFFERENCES

Israel refuses to talk to Hamas, which advocates the destruction of the Jewish state.

Hamas and Fatah have many differences to overcome before they can name a cabinet.

Abbas has not been pleased at the candidates Hamas has proposed to replace Haniyeh as prime minister, the president's aides have said. Haniyeh offered to step aside on Friday.

The frontrunner is Mohammad Shbair, 60, an independent lawmaker and former head of the Islamic University in Gaza, Palestinian sources have said.

Rudwan said Hamas and Abbas agreed the new cabinet would include people affiliated with various factions including Hamas and Fatah, but not senior leaders of the parties.

Abbas spokesman Nabil Abu Rdainah disagreed.

"The new government will not be formed from Hamas or Fatah, but by Palestinian professionals. This is a major step forward," Abu Rdainah said.

Palestinian leaders hope that forming a unity government will persuade foreign donors to resume the flow of aid to the cash-strapped Palestinian Authority.

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

The sanctions have deepened economic hardship in the occupied West Bank and also in Gaza, where Israeli forces have been engaged in an offensive since the abduction of an Israeli soldier by militants in late June in a cross-border raid.

An Israeli air strike killed a 16-year-old boy in Gaza on Sunday, hospital officials said. The army said it had attacked gunmen as they fired a rocket at Israel.

(Additional reporting by Wafa Amr in Ramallah)

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