JERUSALEM - Israel's cabinet on Monday backed the creation of an internal committee to probe its deadly raid on a Gaza-bound aid flotilla, in a move swiftly dismissed by both Turkey and the Palestinians.

The committee, which will include two foreign observers, will look into the legal aspects of the operation in which Israeli commandos killed nine Turkish activists.

But Ankara swiftly dismissed the move, saying that Israel was incapable of being "impartial," and Palestinian leader Mahmud Abbas said setting up an internal committee did not not comply with UN demands.

"The proposition made today for the inquiry committee does not correspond to the request of the Security Council," Abbas said in Paris after meeting French President Nicolas Sarkozy.

Turkey had also demanded a UN-led probe, and threatened to review its ties with Israel if it did not heed calls for an independent inquiry.

"We have no trust at all that Israel... will conduct an impartial investigation," Foreign Minister Ahmet Davutoglu told reporters in Ankara.

Israel formally announced the formation of the three-man committee late on Sunday in a move ratified by the cabinet early on Monday.

It will be chaired by retired supreme court judge Yaakov Tirkel, 75, who will work alongside retired major general Amos Horev, 86, and Shabtai Rosen, 93, a professor of international law.

It will also include two international observers: Irish Nobel Peace Prize winner David Trimble, 65, and Ken Watkin, 55, former judge advocate general of the Canadian military.

But it was not clear what powers Trimble and Watkin would have, and a statement from Israeli Prime Minister Benjamin Netanyahu's office said they would not be able "to vote in relation to the proceedings and conclusions of the commission."

The two could also be denied access to information that could "cause substantial harm to national security or to the state's foreign relations."

The inquiry will run alongside another military probe into the events of May 31, which began last week under retired brigadier general Giora Eiland. The results of that inquiry will be submitted to the so-called Tirkel Commission.

Among those set to testify before the committee were Netanyahu and senior ministers from the Forum of Seven, Chief of Staff Gabi Ashkenazi, and top brass of military intelligence, the Mossad spy agency and the Shabak internal security service, media reports said.

Israel has made clear the committee will not hear any direct testimony from troops involved in the raid.

"I am convinced that uncovering the facts will prove that Israel acted in an appropriately defensive fashion in accordance with the highest standards," Netanyahu told cabinet members on Monday.

"The committee will clarify to the world that Israel acts according to law with responsibility and full transparency," he said.

Washington called the move an "important step forward," but stressed the inquiry should be carried out promptly and its findings "presented publicly" to the international community.

But Hamas, the Islamist movement ruling the tiny coastal Strip, said Israel's continuing refusal to accept an international probe proved its guilt.

"By refusing the formation of an international committee to investigate the massacre, Israel is condemning itself," Hamas spokesman Fawzi Barhum told AFP.

Israel is facing mounting pressure to end the blockade, imposed in 2006 after Gaza militants seized an Israeli soldier in a cross-border raid.

In Luxembourg, an EU diplomat said on Monday Israel had indicated it was ready to ease the blockade significantly.

"The indications we are getting from Israel is that they are willing to go from a positive to a negative list," the diplomat said, referring to a change from a list of permitted items to a list of banned items, with many more previously banned goods allowed in.

But Israeli foreign ministry spokesman Yigal Palmor denied such a move had been agreed, telling AFP: "These are ideas that we are discussing.

"Of course Israel is ready to let through more goods, but we have to discuss which goods go on the list."

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