``Prince Norodom Ranariddh agrees to form a new coalition government with the Cambodian People's Party (CPP) for the sake of the nation, but the formation will be arranged step by step and cannot be acheived now,'' the announcement said.

It said the agreement by the prince's FUNCINPEC party to enter a coalition followed the decision by CPP leader Hun Sen to amnesty five military officials loyal to the prince.

The palace statement said the summit which began late Thursday between Prince Ranariddh and Hun Sen, the July 26 election winner, would focus on the allocation of the position of national assembly chairman, a post demanded by FUNCINPEC.

The talks are being chaired by the prince's father, the ailing King Norodom Sihanouk, who called the urgent meeting in view of hisSaturday departure to Beijing for medical treatment.

Officials from FUNCINPEC and the CPP said progress in meetings had been positive, a signal that months of post election deadlock could be nearly over.

``So far the process is positive, and we have good understanding of each other. FUNCINPEC is ready to form a government with the CPP (Cambodian People's Party),'' said Pok Than, a senior aide to Prince Ranariddh.

``But of course we are stuck on the issue of the CPP proposal of a co-chairman of the national Assembly. FUNCINPEC still maintain their wish to hold the post alone,'' he explained.

Hun Sen's CPP won the July 26 general elections, but did not secure enough seats to rule alone and needs a deal with FUNCINPEC to govern.

He also needs a coalition reepresentative of the election result to secure international recognition, including the currently-vacant United Nations seat and membership of the Association of Southeast Asian Nations (ASEAN).

Since the polls, several rounds of discussions haveended in deadlock, while Prince Ranariddh and his ally Sam Rainsy -- whose self-named party is not represented at the summit -- have kept out of the country since their swearing in as MPs on September 24, a day marred by a grenade attack on Hun Sen.

Hun Sen and Prince Ranariddh served as co-premiers after UN-sponsored polls in 1993, but Hun Sen ousted his senior partner amid heavy fighting in July last year, only permitting him to return in April.

The prince's return on Thursday only came after extensive assurances of safety From Hun Sen, and the offer of palace protection and accommodation from his father king Sihanouk.

CPP officials say much of Thursday's session -- held under the auspices of the King -- revolved around trust building.

``The discussions last night were just setting an agenda and trying to establishsome trust, but they were positive,'' explained a source close to CPP President and parliamentary speaker Chea Sim, who is negotiating alongside strongman Hun Sen.

``The Oppositiondemanded an amnesty for opposition generals, and we agreed on the condition they openly declare their loyalty to the royal government and begin the irreintegration into the armed forces,'' he said.