* Israel says will not release two Hamas leaders-source
* Israel says will not discuss names - official
* Hamas leader accuses Israel of undermining talks-Web site
* Marwan Barghouti confident part of any deal-lawyer
By Nidal al-Mughrabi
GAZA, Nov 25 (Reuters) - Israel has rejected a demand for the release of two Hamas commanders as part of any exchange for a captured Israeli soldier, a source close to negotiations said on Wednesday, signalling talks had hit a snag.
"Hamas still insists on its demands," the source, who declined to be named, told Reuters, naming the two top Hamas prisoners as Ibrahim Hamed and Abdallah Barghouti.
An Israeli official said: "We're not willing to discuss publicly at this stage the names of the people who might or might not be in a swap."
Hamas negotiators who have been consulting their exiled leadership in Damascus would return on Wednesday evening to Egypt, which together with Germany has been mediating the indirect talks between the enemies.
Senior Hamas leader Khalil al-Hayya was quoted by a pro-Hamas website as saying Israel was responsible for undermining a deal because it had not agreed to the demands of the Palestinian factions holding captured soldier Gilad Shalit.
The Palestinian factions hope to exchange Shalit, held since 2006, for hundreds of prisoners held by Israel.
Abdallah Barghouti is serving 67 life terms for his role in attacks on Israelis. Hamed was head of Hamas armed wing in the West Bank before his arrest.
Israel has long balked at granting amnesty to Palestinians jailed for attacks that killed its citizens. While signalling flexibility in its bid to recover Shalit, the Israeli government is wary of a domestic backlash over a deal that bolsters Hamas.
Prime Minister Benjamin Netanyahu said on Tuesday an agreement had not been reached and might not happen following speculation that one could be reached by the Muslim Eid al-Adha holiday on Friday.
Hamas and Israel have traded blame over media leaks predicting an imminent deal, with each accusing the other of trying to engineer public pressure for speedier negotiations.
Officials close to the talks said on Monday that Israel had dropped its objections to some 160 prisoners that Hamas wants included on the release roster.
Hamas has long stated that jailed Fatah leader Marwan Barghouti is among the prisoners it wants released by Israel. Seen as a potential successor to Palestinian President Mahmoud Abbas, Barghouti was sentenced in 2004 to five life terms. "We are confident that Marwan will be in the deal," Khader Shkirat, one of his lawyers, told Reuters. Shkirat said he had visited Barghouti on Wednesday. Israeli Vice Premier Silvan Shalom said on Monday that Barghouti would not be swapped.
Palestinian Prime Minister Salam Fayyad said he hoped Barghouti would be released. "It's certainly our hope and expectation that he will be on the list," he said.
Shalit was seized by Hamas-led gunmen in a 2006 raid across the Gaza border, and his return is a cause celebre in Israel.
Prisoner releases are no less emotive for Palestinians, who see their nearly 11,000 jailed brethren as heroes of a struggle to found an independent state in Israeli-occupied land or -- in Hamas's case -- of an open-ended conflict with the Jewish state. (Writing by Tom Perry; Additional reporting by Alastair Macdonald in Ramallah, Dan Williams in Jerusalem; Editing by Alison Williams) ((email@example.com; Reuters Messaging: firstname.lastname@example.org))