* Netanyahu's security cabinet decides on the move
* U.S.-sponsored peace talks were due to expire next week
* Abbas seeking unity government within five weeks (Adds quotes from Kerry, paragraphs 6-10)
By Jeffrey Heller
JERUSALEM, April 24 (Reuters) - Israel on Thursday suspended U.S.-sponsored peace talks with the Palestinians in response to President Mahmoud Abbas's unexpected unity pact with the rival Islamist Hamas group.
The negotiations had appeared to be heading nowhere even before Wednesday's reconciliation agreement between the Palestinian groups plunged them deeper into crisis. The United States had been struggling to extend the talks beyond an original April 29 deadline for a peace accord.
"The government of Israel will not hold negotiations with a Palestinian government that is backed by Hamas, a terror organisation that calls for Israel's destruction," an official statement said after a six-hour meeting of the security cabinet.
Asked to clarify whether that meant the talks were now frozen or would be called off only after a unity government was formed, a senior Israeli official said: "They are currently suspended."
In Washington, a U.S. official said the United States would have to reconsider its assistance to Abbas's aid-dependent Palestinian Authority if the Western-backed leader and Hamas formed a government.
U.S. Secretary of State John Kerry spoke by telephone with Abbas on Thursday and expressed his disappointment at the reconciliation announcement.
Kerry stressed that any Palestinian government must abide by the principles of nonviolence, recognition of the state of Israel, and acceptance of previous agreements and obligations, State Department spokeswoman Jen Psaki said.
Kerry, who has shuttled repeatedly to the Middle East to push peace efforts, said he was not giving up hope.
"There's always a way forward, but the leaders have to make the compromises necessary to do that," he told reporters.
"We will never give up our hope or our commitment for the possibilities of peace. We believe it is the only way to go. But right now, obviously, it's at a very difficult point and the leaders themselves have to make decisions. It's up to them."
U.N. Middle East envoy Robert Serry offered support for the Palestinian agreement after meeting Abbas on Thursday, saying in a statement it was "the only way to reunite the West Bank and Gaza under one legitimate Palestinian Authority".
The deal envisions a unity government within five weeks and elections six months later. Palestinian divisions widened after Hamas, which won the last general ballot in 2006, seized the Gaza Strip from forces loyal to Abbas in 2007.
'DOOR WAS NOT CLOSED'
In an interview with MSNBC after the security cabinet meeting, Israeli Prime Minister Benjamin Netanyahu appeared to leave open a window for future talks if Abbas reversed course or reconciliation with Hamas, seen by the West as a terrorist group, fell through.
"I hope (Abbas) changes his mind," Netanyahu said. "I will be there in the future if we have a partner that is committed to peace. Right now we have a partner that has just joined another partner committed to our destruction. No-go."
Israeli chief negotiator Tzipi Livni said she hoped a way could be found to return to talks. "The door was not closed today," she told Israel's Channel 2 television.
Wasel Abu Yousef, a top Palestine Liberation Organization official, rejected what he called "Israeli and American threats" and said a unity government would be made up of technocrats.
But Netanyahu dismissed any notion that Hamas would not be the real power behind the bureaucrats.
The Israeli-Palestinian negotiations, championed by Kerry and aimed at ending decades of conflict and creating a Palestinian state in the occupied West Bank and Gaza Strip, began in July amid strong public scepticism in Israel and the Palestinian territories.
The two sides were also at odds over Israeli settlement construction in the West Bank and East Jerusalem, activity most countries deem illegal in areas captured in the 1967 Middle East war, and over Abbas's refusal to accept Netanyahu's demand he recognise Israel as a Jewish state.
For Netanyahu, Abbas's approach to Hamas offered an opportunity to withdraw from the negotiations with a reduced risk of a rift with the United States, Israel's main ally, which also refuses to deal with the Islamist militant group.
A suspension of the talks, while casting blame on the Palestinian reconciliation venture, is also likely to calm far-right allies in Netanyahu's governing coalition who oppose the creation of a Palestinian state and territorial compromise.
For Abbas, whose official mandate as president expired five years ago, an alliance with Hamas leading to a new election potentially strengthening his political legitimacy could outweigh the prospect of any international backlash.
Palestinians have also been angered by Israel's announcement during the negotiations of thousands of new settler housing units and what they say was its failure to tackle substantive issues such as the borders of a future state.
The next immediate steps stemming from the collapse of the talks seemed likely to be Israeli sanctions against the Palestinian Authority, which exercises limited self-rule in the West Bank.
"The sanctions will be measured. We will not cause the Palestinian Authority to collapse," Livni said on television.
Palestinian leaders have already made clear they would seek to further their bid for nationhood via unilateral moves to join various international bodies and United Nations agencies.
The biggest threat for Israel could come in the shape of the International Criminal Court, with the Palestinians confident they could prosecute Israel there for alleged war crimes tied to the occupation of lands seized in 1967.
"Israel will respond to unilateral Palestinian action with a series of measures," said the Israeli statement issued after the security cabinet meeting, without going into detail.
The talks had moved close to a breakdown this month when Israel refused to carry out the last of four waves of prisoner releases, demanding that Palestinians first commit to negotiating after the April deadline.
Abbas responded by signing 15 international treaties, including the Geneva Conventions on the conduct of war and occupations. Israel condemned the move as a unilateral step towards statehood.
Asked whether the reconciliation with Hamas would incur promised U.S. sanctions, PLO Deputy Secretary Yasser Abed Rabo told Palestinian radio it was too soon to penalise a government that had yet to be formed.
"There's no need for the Americans to get ahead of themselves over this. What happened in Gaza in the last two days is just a first step which we welcome and want to reinforce," he said.
"But this step shouldn't be exaggerated, that an agreement for reconciliation has been completely reached... We need to watch the behaviour of Hamas on many details during the coming days and weeks on forming a government and other things." (Additional reporting by Allyn Fisher-Ilan and Ari Rabinovitch in Jerusalem, Ali Sawafta and Noah Browning in Ramallah and Washington's Matt Spetalnick, Mark Felsenthal, Arshad Mohammed and David Brunnstrom; Editing by Angus MacSwan and Mohammad Zargham)
Our Standards: The Thomson Reuters Trust Principles.