More than half-a-million Palestinians have started receiving extraordinary one-off cash-in-hand aid payments of £200 each - in a bid by the European Union to avoid the money going into the hands of the Islamic fundamentalist Government there.

In an innovative move, the EU said it had started paying "social allowances" to 625,000 Palestinians in the West Bank and Gaza left unpaid and poor because of the financial crisis afflicting Hamas, the Palestinian territorist ruling party.

The funds - made through a programme overseen by the World Bank - are an intricate way of bypassing the Palestinian Government, led by a group described by the Home Office as a terrorist organisation, while still benefitting "those who have suffered a significant loss of income" since foreign aid dried up after Hamas came to power in a shock election victory last spring.

Besides direct cash payments of about £200 to each person, the money will finance Palestinian health services and utilities, as well as providing fuel to run generators.

Among the 625,000 Palestinians now receiving direct financial support are 11,500 health workers who are no longer being paid, said Benita Ferrero-Waldner, the EU's external relations commissioner.

The EU is funnelling some £400,000 a month through the programme, which was initially agreed-to for a trial three-month period in July. Ms Ferrero-Waldner said she hopes a review this month will result in its continuation. In all, the EU has put aside £70 million to be disbursed through the aid plan. The 25 EU states are contributing another £23 million.

Meanwhile, at an international conference in Sweden, international donors from countries all over the world pledged $500million (£262m) in separate aid for the Palestinians to reconstruct the territories.

The figure, which is well above the UN's target figure of $330m, was promised after Jan Egeland, the UN's aid chief, called Gaza a "ticking time bomb".

The move came after another UN agreement, on Thursday, to donate $940m of help to rebuild Lebanon.

Carin Jamtin, the Swedish Minister for Aid, said the pledges were "a fantastic result", claiming that $55m of the funds would go to meet a shortfall in emergency funding.

A total of $114m would be spent on humanitarian aid, with the rest going towards rebuilding of infrastructure and other projects, she added.

The move came as Ismail Haniya, the Palestinian Prime Minister, pleaded with public sector workers in Gaza and the West Bank to abandon their plans for an open-ended strike over the non-payment of their wages. He said Palestinians needed to remain united in difficult circumstances, and he appealed to teachers to attend their schools at the start of the new academic year on Saturday.

Mr Haniya was speaking after taking part in a clean-up of streets in Gaza City, where rubbish has piled up because of strikes by refuse collectors.

As well as the financial crisis brought about by last spring's election of a group regarded by the EU and America as a terrorist entity, in June Palestinian militants staged a cross-border tunnel raid and kidnapped an Israeli soldier causing a new outbreak of conflict between Palestinian militants and Israel, mainly centred around Gaza, from where the attack took place.

Mr Egeland said the Palestinians needed at least as much aid and money as the Lebanese, adding that 1.4 million Palestinians were "living in a cage".

"The border crossings are really closed. They cannot get anything out, this is crippling their economy," Mr Egeland said.

Unemployment is high, and in Gaza, the UN says nearly 80% of people live in poverty.

Mr Egeland also warned that, in the 25 years he had been visiting the Palestinian territories, he had never encountered as much hostility as he did this time. "I've never seen so much hatred and bitterness as during my last visit there," he said.

He urged Palestinian militants and the Israeli Army to cease hostilities.

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