U.S. to keep Palestinian aid ban

JERUSALEM (Reuters) - The United States said on Sunday its ban on direct aid to the Palestinian government would remain in place but it broke ranks with Israel by authorizing contacts with some members of the new unity administration.

The U.S. consulate in Jerusalem said Washington would continue to shun Hamas ministers in the power-sharing Palestinian cabinet but permit contacts with non-Hamas members on a case-by-case basis.

The decision to allow some contacts marked a shift in U.S. policy and a split with Israel, which said it would boycott the new government in its entirety, including non-Hamas ministers.

Israeli Prime Minister Ehud Olmert ruled out resuming talks on Palestinian statehood with President Mahmoud Abbas and urged the world to shun the government sworn in on Saturday. Olmert's cabinet voted not to recognize the new administration.

Palestinians hope the partnership between Abbas's secular Fatah faction and Islamist Hamas will stop factional fighting and ease a crippling aid embargo that has increased poverty.

"The loser from the formation of the unity government is Israel and Olmert," said Information Minister Mustafa Barghouthi at the start of the government's first cabinet meeting, adding that delegations would be sent abroad to lobby for support.

Micaela Schweitzer-Bluhm, spokeswoman for the U.S. consulate in Jerusalem, said the year-old U.S. ban on direct aid to the Palestinian government would remain in place until it recognized Israel and renounced violence as demanded by the "Quartet" of Middle East mediators.

"This must continue to be the measure for any support," she said. "There's no change in our assistance policy. But we remain committed to providing assistance to the Palestinian people and we'll continue to do that through the U.N. and other organizations."

Israel has also vowed not to hand over to the unity government tax revenues it has been withholding.

LIMITED CONTACTS

Olmert said contacts with Abbas would be limited to matters related to "the quality of life of the Palestinian population".

"The new government, as it has been declared and presented, limits our ability to conduct a dialogue with ... (Abbas) and narrows the range of issues which we might have been able to discuss in the coming period," he told his cabinet.

He said the new government's platform contained "very problematic elements", an apparent reference to its call for "resistance" against Israel in "all its forms".

While the unity government gives Abbas authority to negotiate with Israel, Hamas would have an effective veto over any deal that emerges, Israeli officials said.

Schweitzer-Bluhm said Washington was disappointed by what she called the new government's "missed opportunity to reinforce the Quartet's principles".

The change in U.S. contact policy will bring Washington in line with Britain and other European powers that have signaled a willingness to hold talks at least with non-Hamas ministers.

Diplomats said the decision would allow contacts with Fatah members and independents in the new cabinet, including Finance Minister Salam Fayyad, a Western-backed reformer.

Norway's deputy foreign minister planned to meet on Monday in Gaza with Prime Minister Ismail Haniyeh of Hamas, Palestinian officials said.

"We will continue our policy of not having contacts with members of foreign terrorist organizations," Schweitzer-Bluhm said. The United States considers Hamas a terrorist group.

But she said Washington would not suspend contacts with "individual Palestinians solely based on their participation in the unity government", so long as they are not Hamas members.

"We will make individual decisions based on our evaluation of the situation," Schweitzer-Bluhm said.

Another official said the United States could consider future contacts with non-Hamas ministers as unofficial in nature, and not directly related to the new government.

(Additional reporting by Dan Williams in Jerusalem and Nidal al-Mughrabi in Gaza)