Rival Palestinian forces faced off at Gaza's border crossing with Egypt on Friday after a Hamas official was caught with 639,000 euros ($804,000) hidden in his clothing, authorities said.
Palestinian Prime Minister Ismail Haniyeh vowed during Friday prayers not to disband a new Hamas-led security force and said he was prepared to increase its size in defiance of President Mahmoud Abbas and the Bush administration.
About 100 Hamas gunmen raced to the Rafah crossing where Hamas spokesman Sami Abu Zuhri was caught with the money. Rafah is guarded by Abbas's presidential guard, raising fears of fresh Palestinian infighting after overnight clashes.
Abbas's elite guard also called in reinforcements.
Hamas said Abu Zuhri was carrying Arab donations for the new government, which is desperately short of funds, and for Palestinians in Israeli jails.
"Is it a crime to bring in money?" Haniyeh said, defending his spokesman. "Are the Palestinian people being forced to starve?"
Abu Zuhri told Reuters: "If bringing support for my people is a crime then I am very proud of this crime."
Abu Zuhri initially refused to leave the border terminal without the money, which was confiscated by Palestinian customs agents. He later left and the gunmen withdrew. The militant group said it expected the money to be quickly returned.
But senior Abbas aide Saeb Erekat said the president had ordered an investigation by the Palestinian attorney general.
The Palestinian Authority is facing a financial crisis after international donors suspended aid because of the Hamas-led government's refusal to renounce violence and recognise Israel since coming to power in March.
The stand-off followed gunbattles overnight in Gaza City between police and a new security force set up by the Hamas-led government in defiance of Abbas. Four people were hurt in the first fighting since the force deployed on Wednesday.
The clashes sent terrified residents fleeing from the streets, where tension has soared amid fears of civil war. US Secretary of State Condoleezza Rice called the emergence of rival security forces a "dangerous situation".
"We do not intend to make one step backward. The force will stay," Haniyeh said during Friday prayers in Gaza City. "Their task is to protect internal security and if there will be a need to increase its number, we will do it."
Israeli officials on Friday confirmed that Prime Minister Ehud Olmert's top two deputies will hold talks with Abbas next week in the highest-level contact since Hamas swept to power.
But Haniyeh said Hamas, whose charter calls for Israel's destruction, would not soften its stance as demanded by Israel and Western powers. "We will not take any step in the direction of recognising the legitimacy of the occupation on the Palestinian land," he said.
MONEY IN BAG Samir Abu Nahla, the Palestinian director of the Rafah crossing, said Abu Zuhri "was wrapping the money around his belly and that was an illegal act". He said the agents took the money and seized Abu Zuhri's passport.
In the overnight clashes, members of the Hamas force, mostly bearded young militants who fought Israel in an uprising for years, surrounded the main police station in Gaza City and traded fire with security men taking cover inside.
"There is no reason for the two forces to fight. There is no dispute of authority," said Khaled Abu Hilal, a spokesman for the Interior Ministry.
Police accused Hamas of starting the clashes by opening fire on the police station.
The 3,000-strong Hamas-backed force, formed under the authority of Interior Minister Saeed Seyam, was deployed in a challenge to the authority of Abbas, whose Fatah movement was defeated by Hamas in the January elections.
In response, Abbas ordered the deployment of a Fatah-loyal police unit. The decision marked the latest step in a deepening power struggle between Abbas and Haniyeh.
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