(Adds British government reaction paragraphs 8 and 17)

By Simon Rabinovitch

LONDON, Aug 13 (Reuters) - Britain's and the international community's refusal to speak to the Palestinian Islamist group Hamas is doing more harm than good, a British parliamentary committee said on Monday.

Pursuing a "West Bank first" policy -- where Britain and others deal with the West Bank, which is run by the more secular Fatah group, and isolate the Hamas-controlled Gaza Strip -- will further jeopardise peace, the House of Commons Foreign Affairs Committee said in a report on the Middle East.

"The government should urgently consider ways of engaging politically with moderate elements within Hamas," the all-party group of lawmakers said.

It said former prime minister Tony Blair should personally engage with Hamas to help reconciliation in his new role as envoy for the Quartet of Middle East mediators -- the United States, the European Union, the United Nations and Russia.

The committee also criticised Britain's response to last year's war between Israel and Lebanon's Islamist Hezbollah movement. It said Blair's refusal as prime minister to call for an immediate ceasefire had done "significant damage to the UK's reputation".

INTERNATIONAL EMBARGO

Britain has joined a Western political and financial embargo of Hamas, an Islamist social and political movement with an armed wing that is regarded as a terrorist group by Israel, the European Union and the United States.

Hamas has been isolated because of its refusal to meet three criteria: recognition of Israel's right to exist, renunciation of violence and adherence to interim peace deals with Israel.

Reacting to the report, Britain's Foreign Office said in a statement: "We continue to make clear that we are ready to respond to any significant movement by Hamas."

However, it said it was not unreasonable to expect that engagement should be based on the three conditions.

The parliamentary report also recommended that Britain press Palestinian President Mahmoud Abbas, whose Fatah group is backed by the West, into negotiations with Hamas to re-establish a national unity government across the Palestinian territories.

The committee said Britain had erred in enforcing the embargo against Hamas even after Hamas agreed in February to form a unity government with Fatah.

Committee Chairman Mike Gapes told BBC radio the international community's lack of positive response "has actually contributed to the deteriorating situation".

Factional fighting between the rival movements eventually led to Hamas taking control of the Gaza Strip in June, while Fatah, which lost elections to Hamas in early 2006, was reduced to administering the larger West Bank territory.

On Iraq, the committee expressed doubts about the United States' "surge" tactic -- a determined offensive against militants fuelled by an injection of more U.S. troops.

"It is too early to provide a definitive assessment of the U.S. 'surge' but it does not look likely to succeed," it said.

The top U.S. military commander in Iraq, General David Petraeus, is due to report on the troop buildup in September but other commanders say the surge has reduced sectarian violence.

On the Israel-Hezbollah war, the Foreign Office said Britain had worked strenuously for a ceasefire, but had wanted a durable one. "The fact that fighting has not broken out again is an endorsement of the approach we took," it said.

(additional reporting by Kate Kelland and Adrian Croft)

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