Thousands of Palestinian residents of Gaza City emerged onto the streets last night to celebrate a Fatah-Hamas agreement on the formation of a national unity government, signed in Mecca and brokered by Saudi King Abdullah.

The agreement between Palestinian Authority Chairman Mahmoud Abbas and Hamas political bureau chief Khaled Meshal was welcomed by Palestinians, whose daily existence teetered on the brink of civil war following weeks of internecine fighting that claimed the lives of dozens.

The power-sharing agreement leaves Hamas without a majority in the government, but also includes guarantees by Fatah that it will continue to implement reforms in the umbrella organization of the Palestinians, the Palestine Liberation Organization.

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A little after 9 P.M., the Fatah and Hamas delegations emerged into a hall at the palace of the Saudi king in Mecca, where the signing ceremony took place.

Nabil Amr, an adviser to Abbas, read out the decree appointing the current prime minister, Ismail Haniyeh, to head the unity government, and assigning him the mandate of forming the new government and bringing it to the Palestinian Legislative Council for approval within five weeks.

It is hoped that the agreement, in which Hamas promises to respect peace deals signed with Israel, a stance that falls short of Quartet demands that the militant group explicitly recognize Israel, will ease the international boycott of the Palestinian Authority.

The task of convincing Washington that Hamas has become moderate enough for the peace process with Israel to resume, is likely to be the Saudi king's next major effort.

But the new formula may not be enough. Israeli Foreign Minister Tzipi Livni insisted yesterday that the Quartet-backed requirement that Hamas recognize Israel and renounce terrorism was not negotiable.

The agreement was announced at a ceremony aired live on Arab television last night, in which King Abdullah sat with Abbas on his right and Hamas leader Khaled Meshal on his left.

The agreement said the new government would respect past peace deals the Fatah-dominated PLO had signed with Israel.

That language represents a loss for Abbas, who had pushed for Hamas to accept a stronger promise to commit to past deals.

Still, Abbas and Meshal insisted the agreement would bring peace between their factions and lavished praises on the Saudi monarch for his help - even comparing him to the Prophet Muhammad in his ability to bring about reconciliation.

"We've been holding our breath. God willing, this is a permanent agreement, not a temporary truce. We hope this will lead to a lifting of the siege," said Mahmoud Qassam, a fish vendor watching the ceremony at his home in Gaza City's Shaati refugee camp.

But international acceptance may be hard to come by. Unless Israel, the United States and the European Union find the agreement's wording satisfactory, they will not lift the financial boycott and it will be difficult to advance the peace process.

A first test of acceptance could come on February 19, when Israeli Prime Minister Ehud Olmert, Abbas and U.S. Secretary of State Condoleezza Rice are due to meet in Jerusalem for talks intended to revive peace negotiations.

If the West does not back the new government and refuses to lift the boycott, it could put a strain on the fragile peace between Hamas and Fatah.

The deal could also fall apart over the formation of the government - particularly over the issue of who will fill the vital post of interior minister, since that individual would control the security forces. Under the agreement, the post will go to an independent, since Hamas and Fatah were each reluctant to see the other faction hold the ministry.

Hamas must submit the candidate for approval by Abbas, and it did not appear as though the two sides have settled on a name.

To boost the new government, Saudi Arabia promised $1 billion in aid to the Palestinians, Ahmed Youssef, a political adviser of Haniyeh, said in Gaza.