* Last minute deal to extend Cairo truce talks
* Palestinians say "no progress" on key issues
* Netanyahu says Israel will respond to rocket fire (Adds Hamas comment)
By Nidal al-Mughrabi and Stephen Kalin
GAZA/CAIRO, Aug 19 (Reuters) - Israel and the Palestinians struggled on Tuesday to reach a lasting deal in Egyptian-mediated talks before a day-long extension of a Gaza ceasefire runs out.
The chief Palestinian delegate to the indirect negotiations in Cairo with Israel cautioned that violence could erupt anew if they failed.
After a last-minute agreement was struck on Monday to extend by 24 hours, until 2100 GMT on Tuesday, a deadline to reach a truce, Azzam al-Ahmad, senior leader of President Mahmoud Abbas's Fatah movement, said there had been "no progress on any point" in the talks.
The Palestinians are demanding an end to the Egyptian and Israeli blockades of the economically-crippled Gaza Strip, where Israel launched an offensive on July 8 after a surge in Hamas rocket fire across the border.
Israel, like Egypt, views Hamas, the Islamist group which dominates the impoverished enclave, as a security threat and wants guarantees any removal of border restrictions will not result in militant groups obtaining weapons.
"We hope that every minute of the coming 24 hours will be used to reach an agreement, and if not (successful), the circle of violence will continue," Ahmad said.
Palestinian officials held more meetings on Tuesday with Egyptian mediators. An Israeli government official said Israeli delegates were still in Cairo poring over details of a possible deal, although the parties had not yet agreed a draft.
An agreement would open the way for reconstruction aid to begin to flow to the Gaza Strip, where thousands of homes have been destroyed in the conflict and the United Nations said 425,000 people have been displaced.
The Palestinian Health Ministry put the Gaza death toll at 2,016 and said most were civilians in the small, densely populated coastal territory. Israel has said it killed hundreds of Gaza gunmen in the fighting. Sixty-four Israeli soldiers and three civilians in Israel have been killed.
An Israeli official, who asked not to be identified, said Israel's delegation had been instructed to insist at the talks that its security requirements be met.
"The moment there is an agreement, the cabinet will be called for discussions," said the official.
A senior Palestinian official in Gaza said sticking points to an agreement were Hamas's demands to build a seaport and an airport, which Israel wants to discuss only at a later stage.
Israel has called for the disarming of militant groups in the enclave of 1.8 million people. Hamas has said that laying down its weapons is not an option and has blamed Israel for talks faltering.
"Hamas is inclined to reach an agreement but unfortunately the Cairo negotiations are faltering because Israel is stalling," Abu Zuhri told Reuters. "We will not accept any agreement that does not secure the aspirations of our people."
ISRAEL THREATENS STRONG RESPONSE
Hamas also insists Israel free Palestinian prisoners while Israel wants Hamas to hand over the remains of two soldiers killed during the fighting.
Israel has signalled agreement to open Gaza crossings, possibly under the supervision of the Western-backed Palestinian Authority, and extend maritime limits in the Mediterranean Sea.
Israel made clear before a five-day truce was extended on Monday that it would continue to hold its fire as long as Palestinians did the same.
The scale of fighting diminished greatly since Israel pulled its ground troops out of Gaza two weeks ago and there appeared to be little appetite on either side for the war to drag on.
However, Netanyahu said on Monday the Israeli military was prepared to take "very aggressive action" if shooting against Israel restarted.
Israel and Hamas have not met face-to-face in Cairo, where the talks are being held in a branch of the intelligence agency, with Egyptian mediators shuttling between the parties in separate rooms. Israel regards Hamas, which advocates its destruction, as a terrorist group.
(Additional reporting by Ori Lewis; Writing by Maayan Lubell; Editing by Jeffrey Heller and Angus MacSwan)