Israel weighs funds transfer to Palestinians

By Adam Entous

JERUSALEM (Reuters) - Israel is considering returning up to half of the tax revenues it has been withholding from the Palestinians as part of a U.S.-led effort to bolster President Mahmoud Abbas, Israeli sources said on Tuesday.

Israel could transfer as much as $300 million to $400 million in phases through a mechanism that guarantees none of the money will go to the Hamas-led government or militants, the sources said.

Israel started withholding the tax revenues, which it collects on the Palestinian Authority's behalf, after Hamas Islamists beat Abbas's secular Fatah faction in parliamentary elections in January 2006.

Coupled with a ban on direct Western aid, the sanctions have pushed the Hamas-led Authority to the brink of financial collapse and have prevented the government from paying full wages to its work force.

Israeli Prime Minister Ehud Olmert was expected to meet on Thursday with Abbas and has been under heavy U.S. and European pressure to take confidence-building steps to revive long-stalled peace talks.

It is unclear whether a decision on the tax funds will be made in time for the Abbas meeting or before Olmert travels to Washington for talks on June 19 with U.S. President George W. Bush.

"It is being considered but it has not been decided yet," a senior Israeli source involved in the matter said.

Another Israeli official said the funds would be earmarked for "humanitarian" purposes and any transfers could be carried out in phases over the course of several months.

Palestinian officials estimate that Israel is withholding some $700 million in Palestinian tax revenues.

But Israeli officials estimate that only $300 million to $400 million of that could be transferred to the Palestinians because the rest of the money has been frozen by court orders.

Details were not immediately available. Officials said the orders were issued apparently in response to compensation demands from Israeli companies owed money by the Palestinian government or from families of Israelis killed by militants.

It is unclear how soon any money could be released to Abbas or to a Palestine Liberation Organization (PLO) account controlled by Palestinian Finance Minister Salam Fayyad.

POLICY BREAK

In a break with Israel, Washington has sought to bolster Fayyad despite his leading role in the unity government led by Hamas Islamists. With U.S. backing, Fayyad has started making partial payments to government workers through the PLO account.

Some Israeli officials decried what they saw as a shift in U.S. policy that would reduce pressure on Hamas to recognize Israel, renounce violence and accept interim peace deals.