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Agreement between the two rival groups will strengthen the Palestinians who can now pose a challenge to Israel, US and EU
Reconciliation between Fatah and Hamas is a historic achievement for the Palestinians, whose rivalries and divisions have weakened them and been exploited by their enemies.
Agreement to form an interim government and fix a date for elections in the West Bank and Gaza Strip next year is also a real triumph for Egyptian mediation – and a surprise given the momentous changes in Cairo in the past few months.
But above all it is a challenge to Israel, the US and EU, which have all shunned Hamas as a terrorist organisation since its shock victory in Palestinian elections in 2006.
The agreement is, in its way, a version of the Arab spring shaking regimes from Libya to Syria and giving hope of change after years of impasse.
First indications from Jerusalem, in the form of an angry reaction from Israel's prime minister, Binyamin Netanyahu, suggested real alarm.
Mahmoud Abbas, the Palestinian president, had pushed in recent months for reconciliation with Hamas, despite differences and animosity.
The PLO gave up its armed struggle and recognised Israel with the 1993 Oslo agreement, although the self-rule deal saw an intensification of Israeli settlement activity and is considered by many Palestinians to have been a strategic error by Yasser Arafat.
Hamas, whose name means the Islamic resistance movement, was founded in 1987 in the Gaza Strip. It still pursues armed struggle. It is backed by Iran and Syria, implacable foes of Israel, and has carried out many rocket attacks and suicide bombings aimed at Israeli civilians. Its leader, Khaled Mishal, has signalled readiness for a long-term ceasefire or "hudna" with Israel, but not for formal recognition.
If implemented, the unity agreement will make it easier for the Palestinians to go to the UN in September and demand international recognition for an independent state – without negotiations with Israel that seem doomed to failure.
But celebrations will be premature until key details are resolved: security is a difficult issue, as are the mechanics of governing the Gaza Strip and the West Bank when they are separated by Israeli territory.
The last attempt at unity collapsed during a brief civil war in 2007 and ended with Hamas seizing power in Gaza, where it remained, firing primitive but occasionally deadly rockets across the border, before and after Israel's Operation Cast Lead offensive killed 1,400 Palestinians.
Fatah, frustrated by slow moving talks with Israel – often rightly dismissed as all process and no peace – had been calling for a deal for two years but until now Hamas had refused to give up on its demands. The Quartet of peacemakers, represented by Tony Blair, has always insisted that in order to secure recognition, Hamas must respect existing peace agreements, abandon violence and recognise Israel. The Fatah-Hamas deal will be closely scrutinised for how it addresses these points.
Abbas's Palestinian Authority is heavily dependent on US and EU aid for its survival. The Obama administration will likely come under pressure from Israel to cut funding if Hamas returns to power in the West Bank. The EU will face a tough decision too – but it will also have a rare opportunity to make its own mark on the endless quest for peace in the Middle East.