Mahmoud Abbas during a press conference at his headquarters in Ramallah, June 10, 2006

Moderate Palestinian leader Mahmoud Abbas has called a referendum on a two-state solution, in a major challenge to the new government, led by the Islamic militant group Hamas. The announcement came after Hamas ended a truce with Israel.

President Abbas threw down the gauntlet to Hamas, by calling a referendum on the idea of a Palestinian state alongside Israel. That implies recognition of Israel, and Mr. Abbas hopes that, if the referendum is approved, it would help end the isolation of the Hamas-led Palestinian Authority.

Hamas is flat broke and unable to pay 165,000 government employees in the wake of international sanctions. The United States and European Union have cut off hundreds-of-millions of dollars in aid, because Hamas, which seeks Israel's destruction, refuses to renounce violence and recognize the Jewish state.

Hamas declared the referendum illegal, and warned that it could exacerbate tensions that have raised fears of a Palestinian civil war. Hamas militiamen and security forces from Mr. Abbas' Fatah faction have fought gun battles over the past several weeks that have left at least 17 people dead.

The referendum is based on a document drawn up by senior Palestinian prisoners from Hamas, Fatah and other factions who are serving time in Israeli jails.

Mr. Abbas, who is also known as Abu Mazen, said the vote will take place July 26. One of his close aides, Palestinian legislator Saeb Erekat, says it is time for the people to decide.

"We must stop the deterioration today, through democratic means. And this is what we're trying to achieve, and this is a very, very bold, courageous step that Abu Mazen took today," he said.

While Palestinian internal tensions are escalating, so is the conflict with Israel. The Hamas military wing declared an end to the 16-month-old truce, and fired rockets into Israel, after seven Palestinian civilians were killed in an Israeli artillery strike on Friday. The Israeli army says it was targeting rocket-launching sites, and that one shell apparently went astray and hit a family picnicking on a Gaza beach.

Israel expressed regret, but Hamas vowed that more attacks are coming.