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Written by: Staff

JERUSALEM, Apr 4 (Reuters) The Hamas-led Palestinian government is running into financial problems one week after taking office and could face crippling shortfalls as early as next month, Western diplomats and Palestinian officials said.

A top official in the Hamas government said it had yet to secure promised funds from some donors needed to pay March salaries on time to 140,000 Palestinian Authority workers.

Western diplomats and Israeli officials said the Palestinian Authority also did not appear to have any foreign reserves to pay April salaries next month in the face of a campaign by Washington to isolate the Islamic militant group.

Officials said one of the few options left open to Hamas would be to try to tap a key investment fund that was initially set up to combat corruption within the Palestinian Authority.

The Palestine Investment Fund, which President Mahmoud Abbas's office took control of after Hamas's election victory, had an estimated value of $1.3 billion at the end of 2005.

But Palestinian officials said it may now be worth closer to $1 billion and only a fraction of that -- between 200 million dollars and 400 million dollars-- could be used to help pay salaries, enough for one-and-a-half to three months.

''For all intents and purposes, this is the bottom of the barrel,'' a senior Palestinian official said.

The financial problems started long before Hamas, whose charter calls for Israel's destruction, won January elections and major Western powers threatened to cut off direct support.

When Hamas ministers were sworn in last week, they inherited an Authority whose budget was already nearly 80 million dollars in the red for the month of March alone.

A few days before the handover, funds transfered to the Palestinians totaling more than 26 million dollars from the United Arab Emirates and Oman were taken by the Amman-based Arab Bank to repay earlier loans, diplomatic sources said. Another 10 million dollars promised by Russia was delayed.

To limit the risk that other foreign funds will be frozen, the Palestinian Authority has tried in recent days to shift its main accounts from the Arab Bank to a local Palestinian bank, Palestinian officials and diplomats said.

Mazen Sonnoqrot, who stepped down as Palestinian economy minister this week, said Hamas's big challenge would be raising money for April salaries, due early next month.

''They have taken empty buckets,'' Sonnoqrot said of the Palestinian Authority's bank accounts. ''There is no money in the bank. There are only deficits.'' The cash crunch stems in large part to Israel's decision to freeze the transfer of tax revenues to the Palestinians.

It is unclear how much of the more than $1 billion a year that the Palestinians get in foreign aid will be withheld now that Hamas has taken control of the Palestinian Authority.

Foreign Minister and senior Hamas leader Mahmoud al-Zahar brushed aside U.S. pressure, saying ''we have several other legitimate means to get support''.

FEW OPTIONS But even if Iran and other Muslim allies come through with promised aid, Western diplomats said it was unclear how the money would get to the Palestinian Authority.

''We have the legal means which can prevent the flow of money to terrorists, and Hamas is a terrorist organisation,'' said Israel's Foreign Ministry spokesman Mark Regev.

Diplomatic sources said major regional banks were also wary of working with the new government. Many of them have branches and other businesses in the United States, where dealing with Hamas is illegal.

The new Palestinian Finance Minister Omar Abdel-Razeq told al-Ayam newspaper he expected to be able to pay March salaries, which had been scheduled to be paid this week, by April 15.

Like Hamas, U.S. officials have been eyeing the Palestine Investment Fund as a way to keep the Palestinian Authority afloat through June or July.

But both have run into resistance from officials at the fund who say an asset sale would bring in no more than $200 million and undercut long-term development goals. Nearly two-thirds of the fund has been pledged against prior Palestinian loans.

''Whether it's one month or two months, what comes after that?'' asked a Palestinian official who is involved in the fund.

Abdel-Razeq said he would soon meet the head of the fund to get an assessment of its financial resources.


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