Palestinian funding hangs in the balance as international donors urge Abbas to stay on

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The international community will consider whether to continue aid to the Palestinian Authority (PA) today amid strong signs that its beleaguered President Mahmoud Abbas will have the pivotal short-term role of maintaining the continuity of relations with the outside world.

European foreign ministers will discuss whether to repeat last year's $304m (£172m) funding to the PA despite the landslide victory in parliamentary elections last week by the Islamic faction Hamas. Both Israel and most Western governments have said they will not negotiate with a Hamas government unless the faction renounces violence and recognises Israel.

Mr Abbas, who is facing the growing prospect of a possibly permanent split in the ranks of his own Fatah organisation, shelved a planned trip to Gaza yesterday which was scheduled so talks could be held with the Hamas leadership on the formation of a government.

But as Gaza and the West Bank remained largely calm despite the absence of an effective Palestinian cabinet, the Israeli Defence Minister Shaul Mofaz told his ministerial colleagues in Jerusalem that Hamas had behaved "responsibly" since last week's election and in the short term would try to curb militant attacks on Israel.

Palestinian sources suggested that Mr Abbas had come close to resigning in the wake of the elections but had been strongly urged not to do so by both Hamas and by the US Secretary of State. Condoleezza Rice. The mere threat of resignation may give Mr Abbas some leverage in persuading Hamas to adopt a more pragmatic approach towards Israel and the international community in the coming weeks

While there were continuing doubts about the funding stance of the US, under heavy Congressional pressure to cut the aid because of Hamas's new majority role in the parliament, there remained optimism among Palestinian officials that European aid would not be cut off from the authority before - or probably after - Mr Abbas and Hamas agree on the formation of a new government.

Diplomats opposed to cutting off aid will argue in Brussels and London today that it would be a waste of the $6bn of Western taxpayers' money spent on maintaining the Palestinian institutions since they were established a decade ago. It would also be counter-productive to threaten an authority which employs 137,000 people, including around 70,000 in security-related jobs.

Haaretz reported last night that Israel would not remit to the PA this month's £24m VAT and customs duties which it collects on the Authority's behalf - while deferring a decision on whether to do so in future.

The move came as Benjamin Netanyahu, leader of the right-wing Likud, tried to turn the Palestinian duties into an issue in the Israeli elections. Comparing Hamas's victory to the rise of Nazi Germany, he said the money should not be transferred and added: "When Hitler rose to power, it was said that ruling would moderate him."

The German Chancellor Angela Merkel's warning in Israel yesterday that the EU would not "directly" fund a Hamas-run PA appeared to leave open the possibility of continued payments through the United Nations, which anyway accounts for most EU funding.

One proposal is to let the presidency under Mr Abbas be the conduit for the funding - thus preserving the protocol of not directly providing cash to Hamas-controlled ministries. Palestinian officials currently expect Hamas to accept Mr Abbas's stated intention to maintain control of the security services.

Though the possibility remains that Ishmail Haniya, the Gaza-based leading Hamas candidate, could be named as Prime Minister, the government is likely to contain a number of "technocratic" figures who are not Hamas members. These seem almost certain to include, as Foreign Minister, Ziad Abu Amr, an independent academic who was nevertheless elected to the parliament with Hamas backing.

Filling the posts has become all the more urgent because of a widespread refusal - at least so far - by former ministers in the defeated Fatah faction to accept Hamas's invitation to join a coalition government.

Mr Abbas is meanwhile coming under pressure from some - highly discontented - "young guard" Fatah figures to follow the example of the Israeli Prime Minister Ariel Sharon and by-pass the organisation's powerful but ageing Central Committee by forming his own party - as Mr Sharon did Kadima - to form a rival organisation to Hamas.

Mr Abbas has been criticised internally for not standing up to the committee, for not tackling corruption by making an example of a handful of politicians responsible for it, and not warning Fatah figures who stood in the elections as independents that they would be expelled. Fatah activists point out that their vote was fatally dispersed by the fact that of 268 independent candidates, 50 per cent were known Fatah politicians.

The discontent - which surfaced in two days of demonstrations by angry Fatah activists in the West Bank and Gaza - is such that one well-informed Palestinian source said that leading "young guard" figures like Mohammed Dahlan and the popular jailed West Bank leader, Marwan Barghouti, might pursue the "Kadima" option even if Mr Abbas refuses to do so.

Mahmoud Zahar, the Hamas leader in Gaza, said in a CNN interview yesterday that the faction would open up a "new channel" through Arab and other Islamic countries - which he said did not include Iran - if funding from the West was cut off. He added: "We are looking for this money, but this money should not be conditioned."

But some Palestinian officials also expect Hamas to adopt an increasingly pragmatic line over the coming months which could even include joining the Palestinian Liberation Organisation which would entail de facto recognition of Israel.