AMERICA and the European Union appeared divided yesterday on whether to halt funding for a Hamas-led Palestinian government, amid fears that oil-rich countries in the region such as Iran could meet any shortfall from the West.

Less than a week after Hamas won a landslide victory in parliamentary elections, the Quartet group — made up of America, the EU, Russia and the United Nations — met in London to agree a position.

In principle all sides accepted that Hamas must recognise Israel’s right to exist and renounce the use of force if it wants to do business with the international community.

But the EU — the most generous donor to the Palestinians with funding of £600 million a year — decided yesterday that it would continue financing the Palestinian Authority while Hamas attempts to form a government.

In a joint statement, EU foreign ministers said that they expected the new Palestinian parliament to support the creation of a government “committed to a negotiated solution of the conflict” with Israel.

“On this basis the EU stands ready to continue to support Palestinian economic development and democratic state-building,” they said.

Bernard Bot, the Dutch Foreign Minister, said that the transition period could last up to three months. Unlike the Bush Administration and the Israeli Government, which are threatening to withhold Palestinian payments unless Hamas changes its ideology, the EU has not set a deadline for compliance. “It would be counterproductive today to make threats, knowing that the government is not yet constituted,” said Philippe Douste-Blazy, France’s Foreign Minister.

Last night the Quartet members insisted that Hamas had to accept the provisions of the “road map” for peace in the Middle East, which calls for the creation of a Palestinian state living side by side in peace with Israel. “All members of the future Palestinian government must be committed to non-violence, recognition of Israel and acceptance of previous agreements and obligations, including the road map,” said Kofi Annan, the UN Secretary-General, reading a joint statement.

Mosheer al-Masri, Hamas MP and spokesman, said that the conditions set by the Quartet served only Israeli interests.

Differences did emerge between America and the EU on how to proceed. The Europeans are prepared to continue funding the Palestinian authority until a new government is in place.

But President Bush set out a far more robust position. “The Hamas party has made it clear that they do not support the right of Israel (to exist),” said Mr Bush. “I have made it clear that so long as that’s their policy that we will not support a Palestinian government made up of Hamas.” The White House has ordered an urgent review of all funding to the Palestinian Authority, which amounted to about £39.6 million last year.

“We do not, and will not, fund a terrorist organisation. We will not fund an organisation that advocates the destruction of Israel and advocates engaging in terror,” said Scott McClellan, the White House spokesman.

Ismail Haniya, a Hamas leader in Gaza, promised that foreign aid would be spent only on “salaries, daily life and infrastructure”.

Jihad al-Wazir, the Palestinian Authority’s acting Finance Minister, said that it would grind to a halt by February 11 if international aid were cut off.

He said that an immediate crisis would result if Israel carried out its threat to withhold $44 million in customs and VAT revenues: “On January 31 a cheque is due to an Israel fuel company. That will bounce the way things stand.”

“By February 2, I will run out of fuel and there will be none in the Palestinian territories. The salaries are due on February 1. I can delay them until February 7 but by the 11th I can’t imagine what will happen on the ground. The authority will cease operating, that’s not to say cease to exist, from the first week of February.”

Palestinians reacted with dismay and defiance to international threats. Mahmoud Abbas, the President, criticised Israel’s move: “The Palestinian people are in bad need of this aid.” One major problem facing the West is that oil-rich states in the region will continue and possibly increase their support to the Palestinians. Saudi Arabia, Kuwait, Qatar and other major donors have not said how they would respond to a Hamas victory. Western officials fear that cutting off aid to the Palestinian Authority could encourage militant Islamic forces to fill the gap.

NATIONAL DEBTS

Between 1993 and 2004 approximately £3.96bn was disbursed in West Bank and Gaza, excluding support to United Nations Relief and Works Agency budget, which received an extra £2.26bn

Source: Palestinian Authority Ministry of Finance

Times Recommends

• Thousands of Tamils dying in 'welfare camp'
• Jackson 'rebuilt his nose before he died'
• Renewed Iran protests crushed by militia