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Israel stops payments to Palestinians

Abbas cites crisis as Olmert rejects contact with 'terror authority'

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JERUSALEM (CNN) -- Israel's Cabinet Sunday immediately halted the transfer of funds to the Palestinian Authority, while dwindling aid has helped push the authority into what its president called an economic crisis.

Acting Israeli Prime Minister Ehud Olmert said his government will not hold contacts with any Palestinian government in which Hamas plays a role.

Also Sunday, four Palestinians were killed in incidents in Gaza and the West Bank, Israeli and Palestinian sources said.

Given Hamas' recent parliamentary election victory, "the Palestinian Authority is, in effect, becoming a terrorist authority. ... Israel will not agree to that," Olmert said at the start of a Cabinet meeting.

"Israel will not compromise with terror and will continue to fight it with all its might," he said.

"However, we have no intention of harming the humanitarian needs of the Palestinian population. Israel will not hold contacts with a government that Hamas is part of -- a small part, big part or a majority."

The Cabinet stopped the payment of about $50 million a month in tax money collected on behalf of the Palestinians, instead of waiting until the Hamas government is in place.

Cabinet Minister Ronnie Bar On said the Cabinet would urge the international community to follow suit, but he stressed that the recommendation would not affect the transfer of funds to humanitarian organizations.

The Cabinet decided not to impose other proposed sanctions, including barring thousands of Palestinian workers, sealing off Gaza, and halting any Gaza development projects Israel is involved in.

Senior Hamas leader Ismail Haniyeh, a relative moderate, was tapped by the Islamic militant group to be the next Palestinian prime minister.

The Hamas-led parliament was sworn in Saturday during ceremonies in Ramallah and Gaza City, officially removing the ruling Fatah Party from its decades-long position of prominence in Palestinian politics.

Rethinking aid

The Palestinian people elected Hamas last month to rule them and now may be facing sanctions from the United States and Israel.

On Friday, the Palestinian Authority agreed to return $50 million in U.S. aid that Washington does not want used by the Hamas-led government, State Department spokesman Sean McCormack said.

The United States, the European Union and Israel consider Hamas a terrorist organization.

The money, doled out last year for infrastructure projects in Gaza, is being returned "in the interest of seeing that these funds do not potentially make their way into the coffers of a future Palestinian government that might not recognize the right of Israel to exist," McCormack said.

He added, however, that the U.S. is still interested in providing assistance to "the most vulnerable among the Palestinian population" through the United Nations or other organizations.

Though Hamas operates a successful network of social and charitable organizations for Palestinians, the group has refused to renounce violence and recognize Israel's right to exist.

The United States, Israel and others have insisted the group must make changes before peace talks can resume.

The so-called Mideast Quartet -- the United States, Russia, the United Nations and European Union -- issued a statement earlier this month calling on Hamas to recognize Israel, denounce violence and terrorism and abide by previous accords signed by the Palestinian Authority.

Strained talks expected

The stage is set for negotiations between Palestinian Authority President Mahmoud Abbas and Hamas, which won 74 of the 132 seats on the Palestinian Legislative Council.

Indications are that the negotiations will be strained. Hamas has said it opposes being bound by the accords signed by the late Palestinian Authority President Yasser Arafat.

Abbas, a member of the ousted Fatah Party, is an advocate of the White House-backed "road map" to Middle East peace.

Abbas on Sunday maintained the parliamentary elections that swept Hamas into power were democratic and that the results have to be accepted.

In an hourlong speech to legislators attending Saturday's swearing-in ceremonies in the West Bank and Gaza, Abbas praised the authority's democratic process but cautioned the new Palestinian leaders that they must work within the framework of peace agreements and policies with Israel. (Watch the Palestinian parliament being sworn in to office -- 2:18)

Abbas also had sharp words for Israel, which he chastised for taking unilateral steps in the form of settlements and assassinations.

Hamas understands Abbas' position regarding Israel, but the group has no intentions of renouncing its anti-Israel positions, spokesman Sami Abu Zuhri said.

Palestinian leaders have said funds are quickly running dry and that government employees could lose their jobs.

The Palestinian Authority's economic woes are due to more than dwindling aid. According to the World Bank, hundreds of millions of dollars contributed to the authority have disappeared over the years.

Hamas officials have railed against Palestinian Authority leaders for squandering much of the money.

Since 1993, the United States has given more than $1.5 billion to Palestinians -- some of it through the Palestinian Authority. Last year, the European Union gave the Palestinian Authority more than $600 million.

Clashes in Gaza, West Bank

In Sunday's violence, two Palestinians -- members of the Popular Resistance Committees -- were killed in southern Gaza when they were spotted trying to place explosives near the Israel-Gaza border, Israeli and Palestinian sources said.

An Israeli military spokeswoman said an Israeli aircraft fired at the two as they tried to place the explosives.

In the West Bank, Palestinian medics said two 17-year-old Palestinians were killed in the Balata refugee camp near Nablus when Israeli troops carrying out searches in the area clashed with stone-throwing youths.

An Israel Defense Forces spokesman said the two were shot dead when they were caught trying to plant an explosive device.

CNN's Ari Bell contributed to this report.

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