Israeli prime minister Binyamin Netanyahu has rejected a Palestinian unity agreement, calling it a "tremendous blow to peace".
His comments on Wednesday come after representatives of Palestinian factions met in the Egyptian capital, Cairo, to mark a landmark reconciliation pact signed a day earlier.
Khaled Meshaal, the leader of the Hamas movement, and Mahmoud Abbas, the Palestinian president and leader of Fatah, attended a ceremony, meeting face-to-face for the first time since 2006.
"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.
He criticised Palestinian president Mahmoud Abbas for striking a deal with Hamas.
"The only way we can make peace is with our neighbours who want peace. Those who want to eliminate us, those who practice terror against us, are not partners for peace," Netanyahu said.
Netanyahu added that a great struggle was under way in the Middle East "between the forces of democracy and moderation and the forces of tyranny and terror".
"I think the fate of the Middle East and the fate of peace hangs in the balance [depending on] which force wins out."
‘No to Blackmail’
Abbas brushed off Netanyahu’s criticism and launched a scathing attack on Israel, saying that "we reject blackmail and it is no longer possible for us to accept the [Israeli] occupation of Palestinian land".
He also said reconciliation with Hamas was an internal Palestinian affair.
"They are our brothers and family. We may differ, and we often do, but we still arrive at a minimum level of understanding."
Abbas also said Israel could not continue to act as "a state above the law" and called for an end to construction in Jewish settlements on lands the Palestinians wanted for a future state.
"Mr Netanyahu, you must choose between settlements and peace," he said.
Britain has cautiously welcomed the agreement.
"We hope that Palestinian unity between Fatah and Hamas will be a step forward," prime minister David Cameron’s spokeswoman said.
"Clearly we will judge any Palestinian government on its actions. We want the Palestinian government, if it emerges, to reject violence and engage in a meaningful peace process."
Cameron also said Britain believed the wave of Arab uprisings had brought an opportunity to push forward the Middle East peace process.
Meanwhile, many Palestinians see a reconciliation between Fatah and Hamas as crucial for their drive for an independent state in territories Israel occupied in the 1967 war.
Fatah and Hamas have been bitterly divided since June 2007 when Hamas took over the Gaza Strip, routing Fatah loyalists that effectively split the Palestinian territories into two separate entities with separate governments.
(Al Jazeera and agencies)
