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Egyptian President General Abdel Fatah al-Sisi has offered Palestinian Authority leader Mahmoud Abbas the chance to create a Palestinian state in the Sinai Peninsula, according to local Israeli media.
The offer to the Palestinian President which, reports say Abbas has denied, would have seen 1,600 square kilometres of the Sinai Peninsula given to the Palestinian Authority, creating a Palestinian state five times the size of Gaza.
According to IDF Radio, the offer would see Abbas relinquish demands that Israel return to the 1967 borders.
In the new and enlarged Gaza, the territory would be demilitarised and Palestinian refugees, many who were unable to return to their towns after the creation of Israel, would have been able to settle there.
As part of the proposal, Palestinian cities in the occupied West Bank would have been autonomous and continued to be under Palestinian Authority control.
Sisi allegedly said to Abbas in the meeting: "You are now 80 years old, if you don't accept this proposal, your successor will."
The Palestinian Authority is yet to publicly comment on the initiative but unnamed sources said that Abbas rejected the deal in a meeting with Sisi.
The Israeli military radio station said that Israeli Prime Minister Benjamin Netanyahu had knowledge of the offer and that the United States had given its approval to such an idea.
An idea along the same lines was introduced years ago by Israeli academics but Egypt rejected the proposal.
Elsewhere, the future of a unity government between Abbas' Fatah and Hamas remains uncertain after the Palestinian president voiced his displeasure at the Islamist group's "shadow" leadership of Gaza.
"We cannot continue working with Hamas this way. There are 27 undersecretaries of ministries who are running the Gaza Strip, and the national unity government cannot do anything on the ground.
"We won't accept the continuation of the situation with Hamas as it is now and in this shape," he said. "There must be one authority and one regime."
Gaza is still recovering from a 50-day conflict which saw more than 2,100 Palestinians killed as well as 66 Israeli soldiers and seven Israeli civilians.