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The Israeli siege on Gaza will remain in place despite the implementation of a peace deal with Turkey, Israeli Prime Minister Binyamin Netanyahu said on Monday.

The maritime blockade on the Gaza Strip will not be affected by the deal that has normalised relations between the two countries since a deadly raid on an aid flotilla severed ties.

"The second thing the agreement gives is continuation of the maritime security blockade off the Gaza Strip coast," Netanyahu said in a live televised broadcast announcing the agreement.

"This is a supreme security interest for us. I was not prepared to compromise on it."

Israel has pounded Gaza –deemed the largest open air prison - during three wars since 2008.

UN officials have warned Israel on its treatment of Palestinians in Gaza, citing deteriorating conditions.

Previously tight relations between Israel and key NATO member Turkey were significantly downgraded after Israeli commandos staged a botched pre-dawn raid on the six-ship Freedom Flotilla in May 2010 as it tried to run the Israeli blockade on Gaza.

Nine activists on board the Turkish-owned Mavi Marmara ferry were killed, with a tenth later dying of his wounds, sparking a bitter diplomatic crisis.

Two of Turkey's key conditions for normalisation - an apology and compensation - have largely been met, leaving its third demand - that Israel lift its blockade on the Hamas-run Gaza Strip - the main obstacle. 

Turkey has reportedly dropped this condition, accepting a watered-down version of what was once a stern proposal.

The deal suggests Israel will allow construction of a hospital in Gaza which was destroyed by Israeli airstrikes, a new power station and a desalination plant for drinking water.

Meanwhile, Turkey's aid to Gaza is now expected to be channelled through the Israeli port of Ashdod rather than sending it directly to the Palestinian enclave.