SHARM EL-SHEIKH - Palestinian President Mahmoud Abbas said on Wednesday there was no deal for now between Israel and the Islamist group Hamas on freeing an Israeli soldier held in Gaza.

Abbas, speaking after talks with President Hosni Mubarak, also said a European Union call for talks with Israel on the status of Jerusalem was important but fell short of Palestinian expectations after changes to an earlier draft.

Egypt has been trying to broker a deal in which Hamas, which runs the Gaza Strip, would release Shalit in exchange for Israel freeing of hundreds of Palestinian prisoners.

The two sides have stopped at the details concerning the numbers and nature of people to be released ... I can tell you that for now there is no deal, Abbas told reporters.

Talks on a swap hit an obstacle in late November, a source close to the discussions said, after Israel refused to free a number of prisoners at the top of Hamas's list whom Israel accuses of making bombs that killed dozens of Israelis.

Days before, Israel and Hamas had come close to a deal when officials said Israel had dropped objections to freeing 160 prisoners whose freedom was sought by Hamas.

The European Union on Tuesday urged Israel to share Jerusalem with the Palestinians as part of a Middle East peace agreement and make the holy city the capital of two states, a position the current Israeli government rejects.

The status of Jerusalem -- a city holy to Jews, Muslims and Christians -- is a sensitive issue for Israel, which considers the city to be its indivisible capital. Palestinians want the eastern part of Jerusalem to serve as the capital of a Palestinian state.

Abbas said the EU statement had watered down an earlier Swedish draft, which had defined a state of Palestine as comprising the West Bank, including East Jerusalem, and Gaza.

Regarding the position of the EU, we all know the Swedish draft was a good draft because it put in clear cut terms the issue of East Jerusalem. Then came the final, vague form, Abbas said after talks in Egypt's Red Sea resort of Sharm el-Sheikh.

We can say it is an important decision but certainly does not fulfill or reach the level of the draft that was presented by Sweden that we agreed with and were satisfied with, he added.

Nabil Abu Rdainah, a top aide to Abbas, also told Reuters in Ramallah by telephone that the EU statement would not help to change the Palestinian position on resuming peacemaking efforts.

The Palestinian leadership refuses to resume peace talks with Israel, which have been suspended over the past year, until Israel freezes all settlement construction. They have rejected Israel's partial 10-month moratorium.

What helps in returning to negotiations is halting settlement expansion and recognizing that the borders of the Palestinian state are the 1967 borders in full, including Jerusalem, Abu Rdainah said.

U.S. ally Egypt, which in 1979 became the first Arab state to sign a peace treaty with Israel, has also been hosting reconciliation talks between Abbas' Fatah group, which controls the Palestinian administration in the West Bank, and Hamas.

There has been little sign of progress after more than year of discussions.

(Additional reporting by Tom Perry in Ramallah, Writing by Edmund Blair in Cairo; Editing by Kevin Liffey)

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