JERUSALEM (Reuters) - An Israeli soldier held captive for the past three years by the Palestinian Islamist group Hamas smiled briefly and looked healthy in a two-minute Hamas video handed over to Israel on Friday.

Gilad Shalit, abducted in 2006, was shown holding up a copy of the Arabic-language newspaper “Palestine” dated September 14, in a classic “proof of life” gesture by Hamas in return for the release of 20 Palestinian women from prison in Israel.

Wearing olive fatigues and seated in a plastic chair against a white background, the 23-year-old soldier read out a statement in Hebrew. His voice was subdued but he appeared calm and healthy. He was clean-shaven and his hair was trimmed.

In the video, released to broadcasters, he said he was being “treated excellently” by his captors.

“I have been hoping and waiting for a long time for the day I will be released, and hope that the current government headed by Benjamin Netanyahu will not now waste the opportunity to conclude the deal,” he said.

He peered over the blue-bannered top of the newspaper as the camera zoomed in for a close-up to show the masthead and date.

Shalit’s father, Noam, later read a statement to reporters saying the family expected Netanyahu “to bring about Gilad’s release as speedily as possible regardless of today’s confirmation of him being alive.”

CHEERS FOR PRISON BABY

The video was handed over in exchange for Israel’s release of Palestinian women serving jail terms under two years.

One prisoner, the only one released to Gaza, brought home a 20-month-old boy born in prison.

Hundreds of people waving the green Hamas flag, the black banners of Islamic Jihad and Palestinian national colors joined a vehicle convoy as it entered Gaza City, sirens blaring.

The baby was snatched from Fatima al-Zaq’s arms in a media frenzy and borne overhead to Hamas leader Ismail Haniyeh, who held him up wailing in front of the crowd.

“We feel wonderful,” said her husband Mohammed, a member of Islamic Jihad. “People are celebrating with us, from all factions ... the prisoners’ release unites us.”

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There were also welcome parties in the West Bank, run by Hamas’s rival Fatah, as the factions briefly set aside their struggle for control of the Palestinian national movement.

President Mahmoud Abbas, of Fatah, greeted the women with flowers. And in Gaza, Haniyeh told the crowd welcoming Fatima and Youssef al-Zaq: “I see the Palestinian people today united behind this step.”

He said he hoped the swap would be “a step on the way to freeing our men and women prisoners from occupation jails (and) a step toward Palestinian reconciliation.”

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NETANYAHU “ENCOURAGED”

The exchange with Hamas, brokered by German and Egyptian diplomacy, is seen as a step toward a major Palestinian prisoner release and freedom for Shalit, priorities for both sides since his capture in a cross-border raid in June 2006.

“Although the path to his release is still long and difficult, the knowledge that he is healthy encourages us all,” Netanyahu was quoted as saying by his spokesman Nir Hefetz.

“The prime minister believes the video is important because it confirms Gilad Shalit’s condition and places total responsibility for Gilad’s well-being on Hamas,” Hefetz added.

Israeli Foreign Minister Avigdor Lieberman later told Channel 1 television in an interview that the “government will do everything in order to release Gilad Shalit in a considered, wise and responsible manner.”

Many Palestinians have relatives or friends among the more than 10,000 Palestinians imprisoned in Israel; and many Israeli families whose sons and daughters serve in the conscript army identify readily with Shalit’s parents.

Shalit served in a tank unit and was captured when Hamas gunmen tunneled into Israel from Gaza and killed two of his fellow soldiers. Two attackers were also killed.

“I want to send regards to my family and to tell them that I love them and miss them very much and yearn for the day that I will see them again,” he said in the video.

Referring to a photograph his family could quickly identify, he asked if his father and two siblings “remember the day you arrived at my base on the Golan Heights on 31-12-2005.”

“We did a tour around the base and you photographed me on a Merkava tank,” Shalit said. “I want to tell you that I am feeling well in terms of health and that the mujahideen from the Izz-el-Deen-al-Qassam brigades are treating me excellently.

Shalit’s parents had until now had received only a few letters and an audio tape from their son, who has not been allowed Red Cross visits. They have campaigned unrelentingly for his freedom but made no statement on Friday.