Talks are being held between Hamas, which heads a Western-boycotted government, and its bitter factional rival the Fatah party of president Mahmud Abbas.
The focus of talks has been a statehood initiative which implicitly recognises Israel's right to exist.
The proposal calls for a Palestinian state on land conquered in 1967 and an end to attacks in Israel and a national unity government.
Unless the initiative is accepted by all factions, Mr Abbas will put it to a referendum already set for July 26.
The referendum plan has angered Hamas which claims the unprecedented vote amounts to an attempt to overthrow its government.
According to the latest opinion poll, three quarters of Palestinians support the initiative, but only 47 percent would actually go out and vote in favour of the document should the plebiscite take place.
Despite international pressure Hamas has so far refused to recognise the Jewish state, renounce violence or abide by past agreements.
Hamas’ intransigence has seen its government boycotted by the West and direct EU and US aid suspended leading to a financial crisis that has hit all Palestinians hard.
Despite optimism, factions are yet to agree on the most controversial aspects of the 18-point "national conciliation document".
The main sticking points are the supremacy of the Palestine Liberation Organisation, acceptance of a Palestinian state in the territories occupied in 1967 and talks with Israel.
Prime Minister, Ismail Haniya, head of the Hamas-led government, said in Gaza City that dialogue was continuing "with the utmost seriousness with a view to reaching agreements on certain points of the prisoners' document".
However he said that it was "premature" to talk about a government of a national unity, as stipulated in the document.