GAZA - The Fatah faction of Palestinian President Mahmoud Abbas and the Hamas group have agreed to halt their clashes even as they headed for a showdown over Abbas' threat to hold a referendum on a statehood proposal.

But violence flared anew at the Gaza border with Israel where Israeli troops shot dead a Palestinian policeman and wounded six, three police and three civilians, medics said. The Israeli army said troops suspected the men were trying to infiltrate the tense frontier.

Israeli troops have increased their vigilance along the border amid an upsurge in rocket firings from Gaza. A rocket hurt an Israeli woman when it slammed into a home on Tuesday.

Abbas has given the Hamas government until the end of the week to accept a manifesto calling for a Palestinian state that implicitly recognises Israel or face a vote on the issue.

Hamas trounced Fatah in January parliamentary elections and has been locked in a power struggle with Abbas ever since.

The president would issue a decree on Saturday setting the stage for the referendum if the Hamas Islamists still refused to back the proposal, Abbas' spokesman, Nabil Abu Rdainah, said.

With shootouts between Hamas and Fatah now frequent, many Palestinians fear a referendum could trigger more violence.

But after a meeting in the impoverished Gaza strip brokered by Egyptian officials, Fatah and Hamas leaders urged calm.

"We order men from Fatah and Hamas to respect the holiness of Palestinian blood," said Khalil Al-Hayya, a Hamas leader.

Fatah lawmaker Majed Abu Shammala said both sides hoped to end internal violence that has killed nearly 20 people in Gaza in the past month. Previous agreements to end factional bloodshed have not lasted long.

A government spokesman, Ghazi Hamad, said members of a 3000-strong new paramilitary force set up by Hamas would be pulled off Gaza's streets and redeployed to limited locations to ease tensions.

The force inaugurated last month despite Abbas' opposition, has been a key source of tension with Fatah.

The Islamists, who refuse to recognise Israel, reject the statehood manifesto penned by prisoners in an Israeli jail and say a referendum would be illegal so soon after elections.

"Palestinian law does not give the president the right to hold a referendum," a Hamas spokesman said in response to Abbas' plan to issue a decree for the vote.

"If the decision is made, we will express our rejection by the means we see suitable," Abu-Zuhri added.

Abbas, a moderate elected separately in early 2005, had set a Tuesday deadline for the Islamists to embrace the manifesto but held off after appeals by Arab leaders.

A referendum would be seen as a confidence vote on the Hamas government, whose election led the West and Israel to cut off funds to the Palestinian Authority.

The document implicitly recognises Israel in its call for a Palestinian state on all of the West Bank and Gaza Strip, which Israel captured in the 1967 Middle East war.

The European Union has proposed an aid mechanism to avoid a collapse of crucial services to Palestinians despite a world financial boycott of the Hamas-led government.

A copy of the proposal obtained by Reuters calls for a monthly USUS$42 million, including funds for civil servants not paid since the aid freeze.

It needs the approval of the quartet of Middle East mediators - the United States, Russia and the United Nations.