Ismail Haniya signalled the beginning of the end for his Hamas-led Palestinian government today, saying he would step aside as Prime Minister to end an international embargo.

In a valedictory Friday prayers address Mr Haniya forecast agreement on a national unity government "within two to three weeks," but refused to speculate on its programme or new leadership.

The Islamist Hamas and President Mahmoud Abbas’s secular Fatah hope this will end Israeli and western sanctions that have left 160,000 Palestinian Authority civil servants virtually unpaid since March, amid worsening civil unrest.

With Hamas retaining control of the Palestinian parliament - and almost certainly any new coalition government - it remains unclear how it will meet Western demands to recognise Israel, renounce violence and abide by previous agreements.

To cheers from his supporters Mr Haniya delivered a nuanced address insisting that Hamas would not sacrifice its principles, but that he is willing to resign to end his people’s suffering.

"We had this dialogue to form the new government and we reached at some point a stage where several parties came to us and told us that the Americans and Europeans and other forces in the region said that such an agreement is beautiful and we can deal with such a government, but on one condition that to end the siege there is a need to change the Prime Minister," he said.

"When I see it that way - that they put the siege on one hand and me being the Prime Minister on the other hand - I say ’No, let us end the siege and let us end the suffering of the Palestinian people.

"Taking such a decision is not a compromise, it is a struggle and a sacrifice. There are those who have sacrificed with their blood and their souls. Is this chair more precious than that?"

Although Hamas deny it marks a defeat, it was a symbolic moment signifying the Islamist movement’s failure to overcome international isolation that led to growing poverty and violent in-fighting.

Hamas supporters were in no doubt of Mr Haniya’s intentions.

"I am upset that we are going to lose this guy as Prime Minister, but I am also happy that things will be easier for the Palestinians," said Jihad Mohammed, 47.

Hamas has come under increasing pressure in recent months, with the authority’s coffers empty and demonstrations by civil servants. There are also growing calls for a national unity government amid escalating violence, notably Israel’s shelling of Beit Hanoun in which 19 civilians were killed.

Beside Mr Haniya sat Bassem Naim, the current Health Minister, who has been tipped as a possible replacement.

Fatah supporters also welcomed the move, but injected a note of caution. "He hasn’t gone yet," said Ashraf Shannon, 32, a journalist. "It is like salaries, you don’t get paid until you have the money in your pocket.

Israel remains wary. "We are following developments inside the Palestinian Authority very closely and we want to see the emergence of a government that will accept the three benchmarks," said Mark Regev, a Foreign Ministry spokesman.

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