Money today emerged as the West's key bargaining counter in curbing the Islamist group Hamas after its landslide victory in the Palestinian parliamentary elections.

After an informal summit in London, European and American leaders repeated that they would not be able to finance an administration which refuses to renounce violence or accept Israel's right to exist.

They are aware, however, that withdrawing the $1 billion-a-year aid lifeline may cause the administration's collapse. Alternatively, a dire funding shortfall may force Hamas to turn to Iran and the wealthy Arab nations for help - further complicating its relations with Israel and the West.

Today Israel refused to hand over its regular monthly £24.4 million tax revenue payment if Hamas enters the new Palestinian government. The acting Israeli Prime Minister, Ehud Olmert, said he would not transfer monthly customs duties to the Palestinian Authority because he feared it would finance terrorism.

As sectarian unrest flared on the streets of the West Bank - 30 Fatah-supporting policemen briefly stormed the parliament building in Ramallah this morning - Mahmoud Abbas, the Palestinian President who is now attempting to oversee the creation of a Cabinet composed mainly of his Hamas rivals, today pleaded with the international community to continue their donations to the poverty-stricken region.

Following a meeting with Angela Merkel, the German Chancellor, in the West Bank town of Ramallah, he promised to stay on as President until 2009, and to continue to push for a peace deal between Israel and Palestine. He told a joint press conference: "We need the aid to continue so that our people can stand on their own feet."

Frau Merkel responded: "We expect all political forces that assume responsibilities to firstly recognise Israel’s right to exist, secondly not resort to violence and thirdly accept committed steps in the peace process. We need clarity very quickly because I believe the peace process must go on."

Jack Straw said that the EU was united in insisting that Hamas downs its weapons. He said: "The onus is now on Hamas to renounce violence, to accept that the fundamental democratic principle is that matters are pursued by arguments and peacefully and not by violence."

Condoleezza Rice, the US Secretary of State, said: "We have, with our European partners, the Russian partner and the United Nations, forged a very strong consensus about the way forward.

"First of all the Europeans, like the United States, also list Hamas as a terrorist organisation. Supporting a peace process on the one hand ... and on the other hand, supporting the activities of a partner in that set of negotiations which does not recognise the existence of the other partner, it just does not work."

Javier Solana, the EU foreign policy chief, met Ms Rice, Kofi Annan, the UN secretary general, and Sergei Lavrov, the Russian Foreign Minister, in London for discussions in advance of a formal summit later this week. He told AFP: "Hamas have to change their methods and they have to accept that violence is incompatible with democracy."

Western donors sent the vast majority of the $1.1 billion in international aid received by the Palestinian Authority in 2005. The donations paid government salaries and financed desperately-needed infrastructure projects. Failure to pay the 137,000 people on the Palestinian Authority payroll could lead to massive lay-offs and ignite violence in an area bristling with guns.

Hamas has responded indignantly to threats to cut off international funding, calling it blackmail. Although it has refused to bow to the demands to renounce violence, leaders were today showing some signs of softening and a new poll showed that 84 per cent of Palestinians want a negotiated peace agreement with Israel.

At a televised news conference, the militant group asked the international community to keep the aid flowing, promising not to use the money for violent activities.

Ismail Haniya, a Hamas leader in Gaza and a possible contender for the new Prime Minister, promised: "We assure you that all the revenues will be spent on salaries, daily life and infrastructure. We send you this message and ask you to deal with our message with an open mind and big responsibility."

Many Arab countries - including Saudi Arabia which is the Palestinians’ largest Arab donor - do not have diplomatic ties with Israel, but most have tacitly accepted the two-state solution enshrined in the road map for peace.

Today Mushir al-Masri, a spokesman for Hamas, hinted that the group would seek more funding from this source: "Stopping international donations will not undermine the work of the government," he said.

Supporting a Hamas-led government would, however, cause tremendous damage to Arab nations, particularly Saudi Arabia, which enjoys strong backing from the United States.

Iran is a possible benefactor. Already believed to fund the Lebanese guerrilla group Hezbollah, the Islamic Republic congratulated Hamas on its victory and appeared ready to help if the West cuts off aid. But Iran would be unlikely to provide more than a fraction of the Palestinian government's $1.6 billion operating costs.

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