Israel should turn over Arab neighbourhoods in Jerusalem to the Palestinians as part of a peace deal with the moderate government of President Mahmoud Abbas, Israel’s deputy prime minister said today in some of the frankest remarks to date about what Israel might be willing to relinquish.

The European Union cut off vital funding to a Gaza power plant, forcing it to shut down the last of its generators and darken tens of thousands of Palestinian homes.

US Secretary of State Condoleezza Rice says Israel is ready to discuss “fundamental issues” with Palestinians who are now governed by leaders accepted by the Jewish state and the West.

Palestinian President Mahmoud Abbas today endorsed the idea of early elections, deepening animosities with Hamas following the Islamic militant group’s violent takeover of the Gaza Strip.

The European Union today said it would support the Palestinian government of Prime Minister Salam Fayyad in the West Bank and urged Israel to do likewise.