US OKs aid channel to Palestinian finance minister

JERUSALEM, May 17 (Reuters) The United States has told the European Union that funds can be channelled to Palestinians through an account run by Finance Minister Salam Fayyad but that restrictions against the Hamas-led government remain in place.

US assurances about financial transactions with a Palestine Liberation Organisation account under the control of Fayyad were conveyed in a series of letters between Washington and Brussels, dated May 14, and obtained by Reuters today.

The move could help Fayyad pay partial wages to more than 165,000 government workers as well as contractors and suppliers.

A crippling Western aid embargo has been in place on the Palestinian Authority since Hamas came to power in March 2006 to pressure the group to recognise Israel, renounce violence and accept interim Israeli-Palestinian peace deals.

Since the sanctions were imposed, government workers have gone without full wages, raising tensions in the Gaza Strip and occupied West Bank. Some partial payments have been made in the past through Abbas's office but only sporadically.

An Israeli air offensive and fierce factional fighting has cast serious doubt over whether the two-month-old unity government between ruling Hamas Islamists and President Mahmoud Abbas's secular Fatah will survive long enough to benefit from the US assurances.

EU officials said they had no immediate plans to provide funds directly to the PLO account and that the bloc would for now continue to pay ''allowances'' directly to Palestinian Authority workers though a programme bypassing the government.

BANKS JITTERY But Western diplomats said the letters should clear the way for funds to be transferred to Fayyad from the Arab League and other donors, and possibly EU member-states at a later date.

''While our financial regulations with regard to transactions with the PA (Palestinian Authority) government remain in place, these restrictions do not apply to the PLO,'' US Assistant Secretary of State for Near Eastern affairs David Welch wrote in the letter to the EU.

Fayyad is counting on using the PLO account to receIve million a month from the Arab League to cover about half the Palestinian Authority's wage bill.

The EU's letter to Welch said funds deposited in the PLO account would be used by Fayyad to make ''direct payments for contractual obligations, including suppliers''.

The objective of providing the new assurances is to ensure that banks feel comfortable transferring money to the PLO and, in turn, to strengthen Palestinians like Fayyad and Abbas who favour a negotiated two-state solution to the conflict.

Banks had been jittery about making transfers to the PLO account since Fatah joined the Hamas-led government in March.

Welch said Abbas and the PLO were trying to ''bring their political system into compliance'' with three conditions set out by the Quartet of West Asian mediators -- the United States, the EU, Russia and the United Nations.

''We believe that the Palestinian people should continue to receive the international support they need via an accountable and transparent mechanism,'' Welch said.

Asked if the bloc wanted to channel funds into the PLO account, an EU official said: ''For the time being, this is not on the agenda.'' Reuters PB VV2245