* Palestinian rivals signal desire for reconciliation
* Egypt plans new talks between Hamas and Fatah
* Israel fears Hamas could topple Abbas
By Nidal al-Mughrabi
GAZA, Jan 4 (Reuters) - Hundreds of thousands of Palestinians joined a rare rally staged by President Mahmoud Abbas's Fatah group in Gaza on Friday, as tensions ease with rival Hamas Islamists ruling the enclave since 2007.
A long hiatus in peace talks between Abbas's administration and Israel has narrowed ideological differences between the two main Palestinian factions. Solidarity has deepened since Israel's Gaza assault in November, in which Hamas, though battered, declared victory against the Jewish state.
Abbas remains based in the Israeli-occupied West Bank, but several of his senior advisers attended Friday's march in the Gaza Strip, festooned with yellow Fatah flags rather than the green Hamas colours that have dominated such events since Hamas fighters drove Fatah from the territory in 2007.
"The message today is that Fatah cannot be wiped out," said Amal Hamad, a member of the group's ruling body. "Fatah lives, no one can exclude it and it seeks to end the division."
The demonstration marked 48 years since the secular Fatah's founding as the spearhead of the Palestinians' fight against Israel. Its longtime leader Yasser Arafat signed an interim 1993 peace accord that won Palestinians a measure of self-rule.
The hardline Hamas movement, which does not recognise Israel's right to exist, rejected the deal, but fought and won a Palestinian parliamentary election in 2006. It formed an uneasy coalition with Fatah until their violent split a year later.
Though shunned by the West, Hamas feels bolstered by the electoral gains of Islamist political movements in neighbouring Egypt and elsewhere in the region - a confidence reflected in the fact Friday's Fatah demonstration was allowed to take place.
"The success of the rally is a success for Fatah, and for Hamas too," said Hamas spokesman Sami Abu Zuhri. "The positive atmosphere is a step on the way to regain national unity."
Egypt has long tried to broker Hamas-Fatah reconciliation, but past efforts have foundered over questions of power-sharing, control of weaponry, and to what extent Israel and other powers would accept a Palestinian administration including Hamas.
An Egyptian official told Reuters that Cairo was preparing to invite the factions for new negotiations within two weeks.
Israel fears grassroots support for Hamas could eventually topple Abbas's Palestinian Authority (PA) in the West Bank. The Palestinians say Israel's settlement building in the occupied territory has undermined Abbas's credibility as a statesman.
"Hamas could seize control of the PA any day," Israeli Prime Minister Benjamin Netanyahu said on Thursday. (Editing by Dan Williams and Alistair Lyon)