Israel warns Mahmoud Abbas against striking agreement with his factional rival Khaled Mashal at meeting this week in Cairo

The Palestinian president, Mahmoud Abbas, will meet the Hamas leader, Khaled Mashal, in Cairo this week to agree details of a new unity government, hoping to close a six-year schism between the political factions that has separated the West Bank from Gaza.

The meeting is scheduled to take place in Cairo on Friday. A spokesperson for the prime minister, Salam Fayyad, confirmed on Sunday he would resign his position should the Fatah and Hamas factions agree to reconcile.

Officials in Israel and the United States greeted news of the meeting with trepidation. Israel has warned that an agreement with Hamas would have grave consequences for its relations with the Palestinian Authority, both in terms of security and the transferral of funds.

"The prime minister [Binyamin Netanyahu] has said repeatedly, the Palestinian Authority must choose between peace and Hamas. They cannot have both," an Israeli official said on Sunday, speaking on condition of anonymity.

"Our security co-operation with the Palestinian Authority, for example, has been based on the commitment of both sides to fighting terrorism. If Hamas is in the government, what will this mean?"

Hamas has been a steadfast opponent of the Palestinian Authority's efforts to reach a peace deal with Israel, a state it refuses to recognise.

The inclusion of Hamas in a unity government would undoubtedly affect Palestinian relations with countries that list it as a terrorist organisation, including the US, Canada, Australia and the EU.

The US deputy secretary of state, William Burns, was set to meet with Abbas in Ramallah on Sunday evening to discuss Washington's opposition to the reconciliation. The Americans denounced a provisional Cairo-sponsored deal between Fatah and Hamas reached in May and threatened to cut funding should the reconciliation proceed. The US is one of the Palestinian Authority's most significant donors, having invested more than $3.5bn (£2.2bn) since the authority was established in the mid-90s.

The implementation of this provisional agreement is reported to have stalled due to Hamas opposition to Fayyad's leadership.

Abbas appointed the US-educated Fayyad in 2007. Fayyad has won the trust and praise of international governments, including Israel, for his steadying hand on security in the West Bank and development of its infrastructure. But Hamas has long opposed him, accusing him of aiding Israel in its blockade of the Gaza Strip.

Fayyad's insistence that he is ready to step aside will undoubtedly smooth the path of reconciliation. In an interview with al Quds newspaper last week, Fayyad urged all factions to mend the division and called upon them to agree upon a new prime minister. "I refuse to be used as a pretext for continuing the split," he said.