Egypt has demanded that Hamas immediately release a captured Israeli soldier to avoid a worsening crisis in the violence-battered Gaza Strip, Palestinian officials and Arab diplomats said Tuesday.

The Egyptian demand came in a "strongly worded letter" from Egypt's powerful intelligence chief Omar Suleiman to the Syrian-based Hamas leader Khaled Mashaal, they said. The officials spoke on condition of anonymity because of the sensitivity of the letter.

The letter also demanded Hamas cooperate fully with Palestinian President Mahmoud Abbas in forming a national unity government, a step that has been stalled by the militant group's refusal to form an administration that recognizes Israel.

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The message reflected increasing impatience with Hamas by Egypt, which has been mediating for months, trying to reach a deal on a prisoner swap for the release of Israeli Cpl. Gilad Shalit, who is being held by Hamas-allied militants in Gaza.

"The leadership has received the Egyptian letter today and is studying it" a Hamas official close to Mashaal told the Associated Press from Damascus.

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Shalit, was captured on June 25 outside the Gaza Strip by Palestinian militants, sparking a military offensive against Gaza. Days later, Hezbollah guerrillas abducted two soldiers in northern Israel, triggering an even larger assault against Lebanon that lasted a month.

Separately, a U.N. rights expert said in Geneva that rights situation for Palestinians has deteriorated to a new low, and blamed the United States, Canada and Europe for contributing to the "tragic" situation.

John Dugard, a South African, said Israel is largely responsible for the "intolerable" situation for Palestinians, three quarters of whom depend on food aid.

"I hope that my portrayal of hardships experienced by such people will trouble the consciences of those accustomed to turning a blind eye and a deaf ear to the suffering of the Palestinian people," Dugard told the U.N. Human Rights Council, the global body's rights watchdog.

Itzhak Levanon, Israel's ambassador to the United Nations in Geneva, rejected Dugard's allegations as "one-sided" and not reflecting reality.

"This report is characterized by errors of omission as well as distortions of both fact and law," he said, adding that Dugard described the situation in the Palestinian territories "in oversimplified manner."

In another Mideast development, Saudi Arabia's foreign ministry on Tuesday denied Israeli media reports that a senior Saudi official and Israeli Prime Minister Ehud Olmert met secretly.

"The report is fabricated and the kingdom carried out its national and regional duties clearly and transparently, and it does not have announced and unannounced policies," a Foreign Ministry official said, according to the official Saudi Press Agency. The official was not identified further by the agency.

Saudi Arabia, which has no diplomatic ties with Israel, has been trying to revive a regional peace initiative it presented in 2002. Israel rejected the plan at the time, but Olmert has indicated he might be more open than his predecessor, Ariel Sharon.

The proposal called for a full Israeli withdrawal from lands it captured in the 1967 Mideast war in exchange for normalization and relations with all Arab countries.

Complete coverage of the Mideast is available in FOXNews.com's Mideast Center.