Gaza City /Tel Aviv  - Israeli ground troops pulled back to the outskirts of Gaza City Friday, as Israel said it would likely convene its security cabinet the following night to discuss progress made in Egyptian-mediated talks for a ceasefire.

"During the talks with the Egyptian intelligence chief, there were signs of significant progress," said a statement from Prime Minister Ehud Olmert's office after an Israeli delegation returned from its second trip to Cairo in two days.

Israeli Foreign Minister Tzipi Livni signed a bilateral deal with US Secretary of State Condoleezza Rice in Washington, aimed at helping to curb arms smuggling into Gaza, as part of an effort to secure a ceasefire between Israel and Hamas militants.

Livni called it a "historic" deal that was a "vital component for the cessation of hostilities."

Meanwhile, as talks continued, Israeli troops pushed towards al- Zahara, a town in the centre of the strip, sparking heavy gunbattles with local militants in the late afternoon.

At least 36 Palestinians, including 10 children, were killed across the enclave Friday in airstrikes and from artillery fire.

Also, 23 bodies were found amid widespread destruction in Tel el- Hawa in the morning, a day after the southern Gaza City neighbourhood witnessed the worst fighting in the city of 400,000 since Israel launched its ground invasion on January 3.

Focussing on relentless air attacks in the first week, Israel began attacking Gaza on December 27 in a bid to curb near-daily rocket and mortar attacks from the strip to its south.

The total Palestinian toll increased to at least 1,192 killed and more than 5,130 injured, according to medical officials. Thirteen Israelis have also been killed, including three civilians.

United Nations Secretary General Ban Ki-moon, in the West Bank city of Ramallah Friday for talks with Palestinian officials, reiterated that the situation in Gaza had become "unbearable" and urged Israel to declare an urgent unilateral humanitarian truce, before finalizing a long-term ceasefire in talks with Egypt and Washington.

Those talks, he said, were "close" to reaching a truce and could come to fruition in "a couple of days."

"There is no time to lose. If we wait one more day, there will be more killings and destruction. The situation is just unbearable," he told a news conference with Palestinian caretaker Prime Minister Salam Fayyad. He also met with President Mahmoud Abbas.

Hamas, the Islamist Palestinian movement that controls the Gaza Strip, announced earlier this week that it had accepted the initiative in principle, with certain reservations.

The Egyptian initiative calls for an immediate short-term "humanitarian" truce during which Egypt will lead indirect negotiations on a longer-term ceasefire, that should include guarantees against border security - an Israeli demand - and an end to the economic blockade of Gaza - a Hamas demand.

That short-term truce could last anywhere between five days to two weeks - during which the Israeli military would gradually withdraw from Gaza - while Hamas could accept a long-term truce of up to one year, though Israel would want a more permanent agreement.

The initiative also calls on Hamas and its bitter rival, the Fatah party of President Abbas, to resume reconciliation talks.

Unconfirmed reports late Thursday suggested the short-term halt to hostilities in Gaza could start within 72 hours. However, some significant differences remain.

Khaled Meshaal, Hamas' Damascus-based political leader, said in Doha, at a summit of Arab leaders, that his organization would not accept Israeli dictates on the ceasefire, and that the militant group "had not suffered a defeat," in the Gaza fighting.

Speculation in the Israeli media indicated the security cabinet vote set to take place after the end of the Jewish Sabbath on Saturday night could focus on a unilateral ceasefire.

Israel's full cabinet meets on Sundays.

The stepped-up diplomacy came amid the worst day of fighting in Gaza Thursday, in which Israel shelled a UN compound and damaged three hospitals.

It also killed one of Hamas' top three leaders in Gaza and made the deepest advance into Gaza City yet, sparking intense battles with local militants little more than a kilometre from the heart of the city.

Hamas vowed to avenge the death of its de-facto Interior Minister Said Siam, who also headed its security forces, and declared Friday another "day of rage" calling for protests in the West Bank.

Some 3,000 Palestinians marched in Ramallah to protest Israel's offensive and called for West Bank-Gaza unity. Women also held up copies of the Koran, chanting slogans in support of Hamas, though for the first time in these weekly protests Abbas' security forces did not arrest the Islamists' supporters.

Protests also took place in Jerusalem and other West Bank cities, including Hebron, where clashes between demonstrators throwing stones and Israeli forces resulted in the death of a 15-year-old, apparently from a rubber bullet. (dpa)