The unity deal and Israel's response could hamper US efforts to revive long-stalled peace talks. US Secretary of State Condoleezza Rice plans a three-way summit with Abbas and Israeli Prime Minister Ehud Olmert in Jerusalem on February 19.

"One option under serious discussion is severing contacts with Abu Mazen," said one of the officials involved in the deliberations, referring to Abbas by his nickname.

An Israeli defence official said ties with Mohammed Dahlan, a top Abbas aide who had spearheaded Fatah's power struggle with Hamas, were also in doubt. Dahlan took part in the unity talks though his role in the new Palestinian government is unclear.

"Things are really in the air," the defence official said.

Israeli officials said any suspension may only be temporary. Top advisers to Olmert, Foreign Minister Tzipi Livni and other ministers were to meet later on Monday to consider the options.

Olmert's spokeswoman, Miri Eisin, declined to comment on what she called "hypotheticals."

Olmert said on Sunday it was too soon to pass judgment on the unity government, but top Israeli officials said the agreement between Abbas and Hamas failed to meet the three conditions set by the "Quartet" of Middle East peace mediators for ending the crippling economic sanctions imposed after Hamas came to power last March.

"We expect the Palestinian government ... to accept all three of the international community's conditions, and that includes recognition of Israel's right to exist, full acceptance and implementation of former agreements, complete stopping of terror actions and a clear renunciation of terror and violence," Eisin said.

Olmert said on Sunday that Israel needed more time to decide whether the unity government deal was acceptable or not.

The February 19 summit with Rice was initially expected to explore the contours of a Palestinian state, but officials said the focus would be on American and Israeli concerns about the unity government deal.

The Mecca agreement made no explicit commitment to recognise Israel. A letter from Abbas reappointing Hamas's Ismail Haniyeh as prime minister contained a vague call to the movement to "abide by the interests of the Palestinian people" and "respect" past agreements and international law.