Palestinian Authority Chairman Mahmoud Abbas said Saturday he was cautiously optimistic that the embargo against the Palestinians would slowly be lifted as the coalition government of Hamas and his Fatah party gains support abroad.

Abass' comments came after a Satuday meeting with Egyptian President Hosni Mubarak in Cairo, which on Friday hosted a rare face-to-face meeting between Abbas and the exiled Hamas political chief, Khaled Meshal. It was the first meeting of the two since their sides joined in a coalition government in March.

Abbas arrived in the Egyptian capital from a seven-nation touring of European Union countries this month - his latest attempt to persuade Europe to end the aid cutoff and fully resume dealings with Palestinian government.

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"There is a possibility of the lifting of the siege on the Palestinian people, it will come gradually," Abbas said in Cairo on Saturday. "We didn't feel that there are problems with the European countries, either in terms of the lifting of the financial siege or the political siege."

Direct financial aid to the Palestinian Authority was frozen after Islamic Hamas militants swept to power in January 2006 elections, but Abbas has argued the cutoff should be lifted because the new unity government includes members of his more moderate Fatah party.

Aid has continued to reach Palestinians through non-governmental organizations and other means of bypassing the government. The new Palestinian government says it needs $1.33 billion in international support to get back on its feet. But the EU, which has been a major donor, says Hamas must recognize Israel first and commit to past agreements before aid is fully restored.

Abbas said his talks Saturday with Mubarak focused on the troubled cease-fire with Israel - which Abbas described as an explosive situation in Gaza.

He said they also discussed the PLO restructuring, which he said was going forward, as well as other issues facing the recently formed Palestinian government.

The talks came amid an escalation in Palestinian-Israeli tensions following a barrage of rockets fired by Hamas earlier in the week threatening a five-month cease-fire. Egyptian officials were concerned the firing of the rockets could sabotage their mediation efforts.

Abbas and Meshal met with the Egyptian intelligence chief in Cairo over the weekend to discuss the deal to free Shalit.

Abbas said he and Meshal on Friday discussed many issues related to the time following the coalition government formation, and the necessary steps that should be taken to enable the government to carry out its duties and lift the siege.

Hamas' representative in Lebanon, Osama Hamdan, has said the meeting would also consider a restructuring of the Palestinian Liberation Organization. The umbrella group - which is separate from the newly formed Fatah-Hamas government - is the sole party authorized to conduct negotiations with Israel.

Since the coalition government was approved, Hamas has been pressing to acquire the post of deputy chairman of the PLO, apparently jostling for more influence in talks with Israel.

There was no immediate comment from the camp of Meshal, who was to meet Arab League chief Amr Moussa later Saturday.

Also, there was confirmation the two Palestinian leaders touched on the fate of kidnapped Israeli soldier Gilad Shalit.

Egypt has tried to negotiate Shalit's release for months and has blamed Hamas for failing to conclude the deal. Israeli Infrastructure Minister Binyamin Ben-Eliezer, who visited Cairo in October, said his government had accepted Egypt's conditions for a prisoner swap and blamed Meshal for the failure to conclude the deal.

Before the meeting, a Palestinian source told the London-based newspaper that Egyptian intelligence chief Omar Suleiman would update Abbas and Meshal about Israel's reaction to the list of Palestinian prisoners that Shalit's kidnappers are demanding be released, Israel Radio reported.

Meanwhile, a United Arab Emirates newspaper said Wednesday that a prisoner exchange between Israel and Hezbollah, which will include the two Israel Defense Forces soldiers held by the Lebanese-based guerilla group, will be concluded by the end of the summer.

Al-Ittihad said that the talks on the swap for the two soldiers are at the stage of "determining names."

It is impossible to determine the veracity of the report, which came from the paper's reporter in Beirut and credits political sources.

According to the report, Iranian-backed Hezbollah has requested the release by Israel of Lebanese, Syrian, Jordanian and Palestinian prisoners, in return for IDF reservists Eldad Regev and Ehud Goldwasser, who were snatched during a patrol along the border with Lebanon in July 2006.

The paper says that one of the central points of dispute between the sides is the condition of the two IDF soldiers held by Hezbollah.

Israel is demanding that Hezbollah provide signs of life from its two soldiers before the negotiations can continue.

Hezbollah has said, however, that Israel must free Arab prisoners for this information, among them Samir Kuntar, the Lebanese terrorist jailed for the 1979 murders of a Nahariya man and his four-year-old daughter.

The paper also said that the Lebanese side of the talks was being managed by Lebanese parliament speaker Nabih Berri, who also headed the cease-fire negotiations during the Second Lebanon War.

The Israeli representatives at the negotiations are headed Ofer Dekel, who was appointed by Prime Minister Ehud Olmert. The negotiations between the two sides are managed by a German intelligence agent known as "Meyer," who has in recent days been shuttling between Jerusalem and Beirut.