RIVAL Palestinian factions yesterday began the task of forming a national unity government, hoping to persuade foreign donors to renew hundreds of millions of dollars in frozen aid.

Hamas, regarded as a terrorist organisation by the West, still looks set to dominate the new line-up, with seven ministerial portfolios and Ismail Haniya continuing as Prime Minister.

The more moderate Fatah will hold four. The rest will go to smaller factions. Mahmoud Abbas, a member of Fatah, would remain as President.

The move is a retreat by Hamas under pressure of international sanctions imposed after it swept to victory in elections in January.

Support within the Palestinian territories has ebbed as 140,000 civil servants went unpaid for seven months and Israel closed border crossings, which led to increased hardship and shortages of food.

One opinion poll on Monday found a surge in support for Fatah, with 34.8 per cent, against 18.8 per cent for Hamas.

Crucial to the new administration’s survival is the acceptance by Hamas of agreements that give implicit recognition to Israel alongside a Palestinian state in the West Bank and Gaza, although the Islamist bombers-turned-politicians balk at recognising the Jewish state.

However, it remains to be seen if the ambiguous and carefully worded text of the 18-clause prisoners’ document — upon which the new Government will base its programme — is acceptable to foreign donors and Israel.

They have insisted that any government must abide by three key conditions: recognise Israel, renounce violence and abide by past agreements.

Mr Haniya said that the Government itself would not be involved in the talks because negotiations are supposed to be handled by the Palestine Liberation Organisation, which is headed by Mr Abbas. The distinction could allow Hamas to retain its hard-line credentials, while the Government gains international acceptance.

Israel has given a cautious response, insisting that any government must also secure the release of Corporal Gilad Schalit, captured by Hamas on June 25. “There’s no doubt that the prisoners’ document falls short of what Israel needs,” said Mark Regev, a Foreign Ministry spokesman.

“Many Palestinians understand that by meeting the needs of the international community there is much in it for them. But if those needs are not met they’re painting themselves into a corner.” Hours after Mr Abbas called on Israel to release more than 60 jailed Hamas officials an Israeli military court ordered the release of 18, although they remain behind bars pending an appeal. Meanwhile, an Israeli soldier was shot dead near the Gaza border, with Hamas taking responsibility.

With Jerusalem and Washington likely to take a hard line there are signs that Europe is anxious to resume aid.

Within hours of the announcement by Mr Abbas of a national unity government, Javier Solana, the European Union foreign policy chief, said that the move “could have a very positive influence to reenergise the peace process”.

Tony Blair appealed for sanctions to be lifted, provided that the Palestinian Government agreed to conditions for the resumption of aid. “On the basis it is faithful to the conditions spelled out by the Quartet — that is the UN, EU, US and Russia — we should lift the economic sanctions on the Palestinian Authority,” he said.

However, US officials were more sceptical. “We are certainly concerned that the national unity Government does not appear to meet the Quartet’s call for a Palestinian Authority government that meets specific criteria that we’ve outlined before,” Tom Casey, the Deputy State Department spokesman, said.

AN ECONOMY IN DECLINE

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