Palestinian president Mahmoud Abbas and Hamas leader Khaled Meshaal buried the hatchet at a Cairo reconciliation ceremony on Wednesday that ends a nearly four-year feud but has angered Israel.
Palestinians gathered in both the West Bank and Gaza Strip to celebrate the long-awaited agreement to put an end to the rivalry between the administrations in the West Bank and Gaza, and restore the unity shattered by deadly infighting in June 2007.
But in London Israeli Prime Minister Benjamin Netanyahu was on the first leg of a tour aimed at convincing European leaders that the deal between Abbas's secular Fatah faction and the Islamist Hamas which the Jewish state boycotts as a terrorist organisation will be disastrous for Middle East peace.
"What happened today in Cairo is a tremendous blow to peace and a great victory for terrorism," Netanyahu told reporters during a visit to London
Abbas said the Palestinians had decided to "turn the black page of division forever," as he joined Meshaal and the leaders of other Palestinian factions in finalising the long-awaited agreement inked on Tuesday.
"We are certain of success so long as we're united ... Reconciliation clears the way not only to putting the Palestinian house in order but also to a just peace," he added.
The Palestinian president said the Israeli premier must now "choose between (building) settlements and peace," and accused Israel of opposing the Palestinian reconciliation accord as "a pretext to avoid peace negotiations."
He was countering Netanyahu's insistence that his Palestinian Authority needs to choose between unity with Hamas, which does not recognise Israel, and peace with the Jewish state.
Abbas has refused to resume peace talks with Israel until it restores a moratorium on settlement construction on occupied territory which the Palestinians want for their promised state.
The reconciliation agreement places no requirement on Hamas to amend its charter to acknowledge the Jewish state's right to exist but Meshaal said on Wednesday that the Islamist group would work for a Palestinian state in the West Bank and Gaza.
Meshaal said Hamas sought "the establishment of an independent sovereign Palestinian state on the West Bank and the Gaza Strip, with Jerusalem as its capital and without giving up an inch nor the right of return."
The Palestinian president had made clear on Tuesday that Hamas would not have to amend its charter under the reconciliation deal.
"It is not required of Hamas to recognise Israel," Abbas said.
Palestinian officials have said the new government's role will be to manage affairs in the Palestinian territories, while the Palestine Liberation Organisation, of which Hamas is not a member, will remain in charge of peace talks with Israel.
Israel called on the European Union to cut its funding to the Palestinian Authority if Hamas does not recognise Israel and renounce violence in the wake of the unity deal.
"As the largest funders of the Palestinian Authority, you have a heavy responsibility to make it clear to the Palestinians that failure to comply with the Quartet's conditions will be met with sanctions," Deputy Foreign Minister Danny Ayalon said on a visit to Estonia, according to a statement from his office.
The international peace-making Quartet, made up of the United States, United Nations, European Union and Russia, has said that for Hamas to be recognised as a ruling party it must renounce violence, recognise Israel and previous agreements signed between the Jewish state and the Palestinian Authority.
But senior Palestinian official Nabil Shaath said the Quartet conditions were not practical.
"All the Europeans and the Russians and others understand and agree with us 100 per cent that all the rules of the Quartet are unworkable and don't make sense," Shaath told Israeli public radio.
"All that the Quartet needs to know is that Hamas will refrain from any violence and that Hamas will be interested in the peace process," he said.
In Gaza, around 700 people marched to the Square of the Unknown Soldier waving Palestinian flags as well as the green and yellow flags of the two factions for a celebration of the long-awaited accord.
Many participants waved the green flag of Hamas, and there were more than a dozen people raising the yellow Fatah flag, which has been banned in Gaza since the secular movement was ousted from the territory by the Islamists in June 2007.
"This is the first time in four years I can hold a Fatah flag alongside a Palestinian flag," said Mahmud al-Riati, a 20-year-old engineering student wearing a Palestinian flag tied around his shoulders like a cape.
Hamas TV resumed broadcasts in the West Bank and the Palestinian Authority began transmitting in Gaza, also for the first time since 2007.
At 11:00 am (0800 GMT), the official Palestinian Authority TV channel began broadcasting from Gaza City, opening with a live interview with senior Hamas official Ismail Radwan, followed by interviews with people about the nascent reconciliation deal.
An hour later, Hamas's Al Aqsa TV resumed broadcasts in the West Bank, screening an interview with Hassan Khreisha, deputy speaker of the Palestinian parliament.
Palestinian Prime Minister Salam Fayyad hailed a "very happy moment." "We've been waiting a long time for this to happen," he said, speaking in the West Bank city of Ramallah.
The reconciliation agreement provides for the formation of an interim government of independents to lay the groundwork for presidential and parliamentary elections within a year.
Negotiations on the new government line-up were due to start straight after Wednesday's ceremony.
The factions will also form a higher security council to work out how to integrate Hamas and Fatah's rival security forces and create a "professional" security service.