Faltering Middle East talks are in tatters after two rival Palestinian factions agreed to form a new unity government that could include members who oppose Israel's existence.
Leaders of the moderate Fatah and the Islamist Hamas groupings announced that they had cast aside years of differences to conclude a reconciliation pact that would yield a new government within five weeks and elections in six months.
The announcement - read out by Ismail Haniyeh, Gaza's Prime Minister at a news conference - prompted scenes of jubilation in the tiny coastal territory, which has been run by Hamas since 2007 after it seized control from Fatah following a brief power-sharing agreement.
But it drew a sharp response from Israel, which immediately cancelled negotiations with the Palestinians scheduled for yesterday.
The cancellation came amid frantic American-mediated efforts to find a formula that would extend the talks past their deadline of April 29.
Prospects for prolonging them already hung in the balance after Israel this month broke a promise to release Palestinian prisoners, prompting Palestinian Authority President Mahmoud Abbas to sign up to 15 international treaties and organisations in breach of a commitment.
Minutes after the announcement, up to 12 people were injured in Beit Lahiya, north of Gaza City, when an Israeli air strike apparently missed its target in what the military called a "counter-terrorism operation". The injured included several children, Reuters reported. Senior Israeli ministers convened to decide whether negotiations could continue with a government that included Hamas, which refuses to recognise Israel and has officially pledged to destroy it.
Israeli Prime Minister Benjamin Netanyahu had earlier issued what appeared like an ultimatum to Abbas - in effect telling the Palestinian leader to choose between peace talks and Hamas.
"I said this morning that Abu Mazen [Abbas] needs to choose between peace with Israel and an agreement with Hamas, a murderous terrorist organisation that calls for the destruction of the state of Israel and which both the United States and the European Union define as a terrorist organisation," Netanyahu said.
"This evening, as talks are still ongoing about extending the negotiations, Abu Mazen has chosen Hamas and not peace. Whoever chooses Hamas does not want peace."
Hamas was responsible for dozens of suicide bombings that killed hundreds of Israelis during the 1990s and the second Palestinian intifada of 2000-2005. Yesterday's agreement followed two days of negotiations in Gaza City between a Palestine Liberation Organisation (PLO) delegation and Mousa Abu Marzouq, Hamas's deputy leader-in-exile, who had been allowed safe passage through Egypt. The accord is designed to end a division that has seen Abbas's Western-backed Fatah movement running the West Bank while being excluded from power in Gaza.