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By Dan Williams and Ola Galal

SHARM EL-SHEIKH, Egypt, June 25 (Reuters) - Israeli Prime Minister Ehud Olmert said on Monday he was ready to free about 250 Palestinian prisoners as a goodwill gesture to help President Mahmoud Abbas and his Fatah faction.

The two leaders held talks in the Egyptian Red Sea resort of Sharm el-Sheikh, their first meeting since Islamist Hamas militants seized the Gaza Strip nearly two weeks ago and left Abbas and his secular forces holding the larger West Bank.

Olmert told a joint news conference with Palestinian, Egyptian and Jordanian leaders he would work with "moderates" like Abbas against "terrorists" -- a clear reference to Hamas militants -- to secure peace in the Middle East.

"I look to ... Prime Minister Olmert to start serious political negotiations, according to an agreed timeframe, with the aim of setting up an independent Palestinian state. My hand is stretched out to the Israeli people," said Abbas.

Olmert said he was willing to resume a U.S.-sponsored programme of two-weekly talks to push forward with efforts to found a Palestinian state, despite Hamas's control of Gaza.

"I'm optimistic that, especially in these turbulent days ... an opportunity has been created to seriously move forward with the regional peace process. I don't plan to let this opportunity slip away," said Olmert.

"As a gesture of goodwill towards the Palestinians, I today announced my intention to release (about) 250 prisoners who are members of Fatah who do not have blood on their hands, with their commitment not to involve themselves again in terror."

Olmert said Israel would make good on pledges, issued after Abbas ditched Hamas, to end economic sanctions and hand over hundreds of millions of dollars in Palestinian tax revenues as well as to ease travel restrictions in the occupied West Bank.

ACCUSATIONS

Abbas accused Hamas on Monday of staging a "bloody coup" in Gaza that had deeply wounded the Palestinian people.

Hamas has accused Abbas of a "coup" by dismissing the Hamas-led Palestinian government that held power before the Gaza takeover and of giving in to "Zionist blackmail".

The Arab leaders at the meeting asked Olmert in an open session to take steps to make life easier for Palestinians and also to start political negotiations on a final settlement of the Israeli-Palestinian conflict.

Abbas's short-term demands included an end to all work on Jewish settlements in Palestinian territory and on the wall or fence that Israel is building through the West Bank.

Israel should also release prisoners, remove checkpoints and transfer frozen tax revenues to the Palestinians, he said.

Hamas, excluded from the meeting because the participants recognise only Abbas, said the leaders were chasing a mirage.

"(The summit) did not give our people anything new except some talk about some money, which was stolen from us," said Hamas official Sami Abu Zuhri.

Earlier on Monday, Hamas militants in Gaza posted an audio tape of a captive Israeli soldier on the Internet. Sergeant Gilad Shalit was heard asking for medical treatment and urging Israel to free Palestinian prisoners.

A spokesman for the Hamas militants said it was up to Israel to make a deal to free Shalit, a 20-year-old conscript.

He was seized a year ago to the day by militants who tunnelled up to his border post and killed two other soldiers.

The release of the tape showed the obstacles to a settlement with 1.5 million Palestinians, one in three of the new state's potential citizens, now living under Hamas rule.

"The only beneficiary of these summits is the Zionist enemy," said Mushir al-Masri, a member of the Hamas majority in the now moribund Palestinian parliament.

"It is surprising that at a time when Abbas has shut the door on talks with Hamas he is running and begging for a meeting with Olmert." (Additional reporting by Mohammed Assadi)

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