Palestinian factions have signed a reconciliation deal that will pave the way for elections within a year.

Representatives of factions including Palestinian president Mahmoud Abbas's Fatah party and its rival Hamas inked the deal following talks with Egyptian officials in Cairo on Tuesday.

"We signed the deal despite several reservations. But we insisted on working for the higher national interest," said Walid al-Awad, a politburo member of the leftist Palestine People's Party.

"We have discussed all the reservations. Everyone has agreed to take these points into consideration," he told Egyptian state television without elaborating.

"Palestinians in the Gaza Strip and the West Bank will be celebrating this agreement... We must now work to implement what was agreed in the deal."

A formal signing ceremony is scheduled to take place in Cairo on Wednesday.

The deal, which was announced last week, comes after 18 months of fruitless talks and envisions the formation of an interim government of independents that will pave the way for presidential and legislative elections within a year.

Israel has heavily criticised the agreement, refusing to deal with a government that includes Hamas, which it and the United States brand a terrorist organisation.

But Palestinian officials say the new government's role will be to manage affairs in the Palestinian territories, while the Palestine Liberation Organisation (PLO) will remain in charge of peace talks with Israel.

Fatah and Hamas have been bitterly divided since June 2007 when Hamas took over the Gaza Strip, routing Fatah loyalists in bloody confrontations that effectively split the Palestinian territories into two separate entities with separate governments.