The European Commission said on Friday it had halted aid payments to the Hamas-led Palestinian government because the new cabinet had not recognised Israel's right to exist or renounced violence.
Palestinian Foreign Minister Mahmoud al-Zahar, whose government took office last week, warned the EU in response that cutting aid would harm its credibility and may lead to boycotts of European interests in the Islamic world.
"For the time being, there are no payments to or through the Palestinian Authority," Commission spokeswoman Emma Udwin said.
She told a news briefing the European Union executive was adopting "a policy of maximum prudence", which did not prejudge decisions by foreign ministers of the 25-nation bloc when they meet in Luxembourg next Monday.
"We have to prepare some changes in terms of financing," German Foreign Minister Frank-Walter Steinmeier said in Prague, adding that the Hamas government had not yet signalled it would meet the international community's conditions to recognise Israel, renounce violence and accept past peace agreements.
"I am afraid (cutting aid) may wreck the credibility of the European Union in the Arab and Islamic world," Zahar told Reuters, adding he would write to EU foreign ministers Saturday.
The Commission and EU governments appeared keen to play down the aid freeze and avoid responsibility for pulling the plug on the Palestinian Authority, to which the EU has been the main donor since its creation under the 1993 Oslo peace accords.
A British official said he expected the Commission to inform ministers of its decision to suspend aid to the Palestinian government temporarily, while Udwin said it was for ministers to take decisions.
Diplomats said the freeze covered all direct aid to the Palestinian government and payment of public employees' salaries with EU funds through the World Bank, but not humanitarian aid through international and non-government organisations (NGOs).
About 30 million euros ($35 million) in direct government aid was currently in the pipeline, an EU official said.
The Commission released 120 million euros in direct and indirect aid last month, including to pay electricity bills directly to the suppliers, before Hamas took office.
EU diplomats said talk of the Palestinian Authority running out of cash to pay salaries at the end of April, with the risk of social chaos, was exaggerated. But the charity Oxfam warned that NGOs do not have the capacity to run health and education services and cutting aid to the PA would deprive the population of these services.
"The Palestinian Authority is responsible for (these services) and therefore donors must keep funding it," Jeremy Hobbs, director of Oxfam, said in a letter to the EU.
A draft statement to be issued by EU ministers next Monday, seen by Reuters, did not mention a suspension of aid, saying only that direct assistance to the Palestinian government would inevitably be affected.
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