Hamas says Germany helps in Israel prisoner talks

* Hamas confirms German mediation

* Israel, whose PM is due to visit Berlin, closed-lipped

GAZA, Aug 25 (Reuters) - German involvement in mediation over an Israeli-Palestinian prisoner swap has advanced the negotiations but a breakthrough is not imminent, Hamas said on Tuesday.

Hamas, an Islamist group running the Gaza Strip, wants to trade a captive Israeli soldier for hundreds of jailed Palestinians. Israel long balked at freeing some of the prisoners but local media have recently reported progress.

Hamas does not recognise Israel so the talks have been conducted through Egypt. Its president, Hosni Mubarak, told an American television interviewer last week that his country was working "in collaboration and cooperation with the Germans".

Hamas at first declined comment but on Tuesday a senior official, Ayman Taha, told Reuters: "There is nothing new except the German intervention, which caused things to move. But things have not yet reached a breakthrough."

Israel has not talked about its efforts to retrieve Gilad Shalit, a conscript seized by Hamas-led gunmen on the Gaza border in June 2006 who has been kept incommunicado since.

Israeli Prime Minister Benjamin Netanyau is scheduled to meet German Chancellor Angela Merkel in Berlin on Thursday. In Berlin, a German official did not want to comment.

Keen to atone for its Holocaust history, Germany has been a stalwart ally of the Jewish state and in 2004 and 2008 helped negotiate sensitive Israeli-Lebanese prisoner swaps.

A source close to the mediation said Israel has dropped its objections over some of the inmates on Hamas's release roster.

Hamas, the source said, signalled flexibility on an Israeli demand that some freed prisoners be deported rather than returned to homes in the West Bank, where the Islamists' rival, U.S.-backed Palestinian President Mahmoud Abbas, holds sway.

Israel holds some 11,000 Palestinians in its jails on charges ranging from minor criminal offences to militant links and orchestration of suicide bombings and other attacks on Jews. Most Palestinians regard the prisoners as national heroes.

The involvement of a top European power in the Shalit talks could help Hamas boost its standing abroad. The Islamists are formally shunned by the West for their hardline stance against Israel and against Abbas, who seeks a Middle East peace deal. (Writing by Dan Williams; Editing by Robert Woodward)