(Adds Olmert comment)

By Mohammed Assadi

RAMALLAH, West Bank, June 21 (Reuters) - The Palestinian and Israeli leaders agreed on Thursday to meet for the first time in two months after an Islamist takeover of the Gaza Strip prompted both to sharpen their confrontation with Hamas in the enclave.

Mahmoud Abbas, the Western-backed Palestinian president, will meet Israeli Prime Minister Ehud Olmert at the Egyptian Red Sea resort of Sharm el-Sheikh on Monday, officials said.

Egyptian President Hosni Mubarak and Jordan's King Abdullah will meet Abbas there on Sunday before the four-way summit.

Olmert said they would "jointly work to create the platform that may lead into a new beginning between us and the Palestinians". U.S. President George W. Bush, whom Olmert met in Washington this week, was still determined to see a Palestinian state established before he leaves office in 18 months, he said.

Before the summit, Israel's cabinet is expected to agree on Sunday to release hundreds of millions of dollars of Palestinian tax revenues, collected by Israeli officials and withheld for the past 15 months since the Islamist Hamas movement formed a Palestinian government after winning a parliamentary election.

In his turn, Abbas is issuing orders to disband militia groups -- both from Hamas and the al-Aqsa Martyrs Brigade which is nominally loyal to his own, secular Fatah faction.

Along with the United States and European Union, Israel refuses to deal with Hamas on the grounds that it refused to renounce violence or formally recognise Israel's right to exist.

Since the Islamists seized control in Gaza last week, complex Western efforts to bolster Abbas, leader of the long dominant secular Fatah faction, have been replaced with a simple lifting of sanctions on the West Bank.

Israel, which withdrew troops and settlers from Gaza in 2005, is letting nothing but essential humanitarian supplies through its security cordon around the coastal enclave.

Abbas, in an unusually emotional speech on Wednesday to leaders of the Palestine Liberation Organisation (PLO), ruled out any dialogue with Hamas, saying he felt personally outraged by its takeover in Gaza and accusing it of trying to kill him.

Hamas denied the charge. Abbas's supporters aired television film they said showed Hamas militants laying an ambush for him.

COMMON GROUND

Abbas last met Olmert in April, despite an undertaking by both to U.S. Secretary of State Condoleezza Rice in March that they would meet every two weeks to try to find common ground for resuming negotiations on a peace deal.

Olmert's popularity has been at rock bottom since last year's war in Lebanon and Abbas led a Palestinian Authority divided between his Fatah group and a Hamas-led government, so neither has seemed able to deliver new negotiating options.

Nor do many Israeli and Palestinian officials hold out much hope of Bush forcing the issue as his presidency nears its end.

The schism between the West Bank and Gaza has left Palestinians' hopes for a state in both territories in doubt.

Yasser Abed Rabbo, a senior aide to Abbas, said he hoped the summit would lay a cornerstone for starting negotiations that would lead to an agreement to achieve Palestinian statehood.

He also said Israel should hand over all the $700 million in withheld taxes. Israeli officials say they expect cabinet to transfer only about half. Abed Rabbo said Abbas would also press Olmert to lift Israeli checkpoints in the occupied West Bank.

Abbas has set up an emergency government, after sacking a Hamas-Fatah unity cabinet headed by Hamas. The Islamists insist that coalition is still alive and headed by its Ismail Haniyeh.

Palestinian Liberation Organisation leaders gathered around Abbas for a PLO legislative session in Ramallah urged him to hold new elections and disband all militias, both from Hamas and Fatah forces -- a move demanded by Israel. Hamas said any early election would amount to a "coup" and it would try to block it.

Washington implemented a pledge to remove an aid embargo against the Palestinians and published a licence on Thursday permitting transactions with Abbas's new government, Jacob Walles, the U.S. consul in Jerusalem, said.

Hamas was critical of the Abbas-Olmert summit plan. Fawzi Barhoum, a spokesman in Gaza, said it was "not justified and will not bring any benefit to the Palestinians or the world".

In Gaza, protesters burned Abbas's effigy.

Several dozen Palestinians with U.S., British and other foreign passports were allowed by Israel to leave through the security cordon on Thursday amid anxieties among Gaza's 1.5 million people that supplies may start to run out.

(Additional reporting by Nidal al-Mughrabi in Gaza, Wafa Amr in Ramallah and Ori Lewis, Allyn Fisher-Ilan and Adam Entous in Jerusalem)

AlertNet news is provided by