BBC Gaza reporter Johnston freed -- sources

GAZA, July 4 (Reuters) Alan Johnston, the BBC journalist held hostage in the Gaza Strip since March, was handed over by his Islamist captors to ruling Hamas officials today, Palestinian sources close to negotiations for his release said.

The sources told Reuters they saw the 45-year-old Briton being taken into the care of officials from the Hamas movement, which seized full control of Gaza three weeks ago.

''He is sitting with his colleagues from the BBC office in Gaza,'' one of the witnesses said in the early hours of the morning.

''He is talking to them and he looks fine and well''.

A witness later saw Johnston arrive by car at Hamas leader Ismail Haniyeh's residence where officials said he may hold a news conference before being taken to British diplomats for a journey home that would involve him leaving Gaza for Israel.

Like most Western powers, Britain shuns Hamas for its refusal to abandon violence against the Jewish state and does not recognise Haniyeh's government in Gaza.

However, British diplomats based in Jerusalem have met Haniyeh in Gaza and discussed Johnston's plight in recent weeks.

In London, no immediate comment was available from the BBC or the British Foreign Office.

TROUBLED GAZA Johnston, the only Western correspondent working full-time in the troubled coastal enclave, went missing on March 12 when his car was found abandoned.

His captors later declared themselves to be the Army of Islam, a group with al Qaeda-inspired rhetoric and links to one of Gaza's powerful clans.

They issued Web videos showing Johnston and seeking the release of Islamists held prisoner by Britain and other states.

Most recently, after Hamas officials threatened to free him by force from the clan's stronghold, Johnston was shown wearing a suicide belt with the warning he would die if that happened.

Hamas, apparently eager to show its ability to impose order in Gaza after many months of factional fighting, had increased pressure on the hostage-takers to relent and had surrounded their neighbourhood late yesterday.

The Army of Islam and Hamas exchanged prisoners in recent days during negotiations to free Johnston.

Hamas was elected to run the Palestinian government 18 months ago but was shunned by Israel and Western powers. Its forces routed those of Western-backed Palestinian President Mahmoud Abbas in Gaza in a week of fighting last month.

Its local leader, Haniyeh, still considers himself prime minister but Abbas has appointed an emergency government without Hamas involvement in the larger territory of the West Bank.

REUTERS DKS RAI0707