By Adam Entous

JERUSALEM, Jun 11 (Reuters) With Bush administration backing, a 15-month-old economic embargo of the Hamas-led Palestinian Authority is being eased with funds from Arab and European donors, Israeli and Western officials said today.

Some Israeli officials have decried what they see as a shift in US policy aimed at bolstering Palestinian President Mahmoud Abbas, whose Fatah faction joined a unity government led by Hamas three months ago, and currying Arab states' support.

''The Palestinian Authority's financial position is much better today than six months ago. We are losing,'' said a senior Israeli official involved in overseeing the economic embargo imposed after Islamist Hamas came to power in 2006.

In the one month since Washington said donors could send funds to Finance Minister Salam Fayyad through a Palestine Liberation Organisation (PLO) account, the account has received at least 160 million dollars.

The sum is enough to cover partial salary payments for the next several months.

The European Union said today it was renewing support for the Finance Ministry, starting with a 4 million euro (.3 million) project to monitor the growing flow of donor funds.

Diplomats said the EU was also considering expanding an existing aid mechanism to pay Palestinian police, as well as a portion of the Palestinian Authority's arrears to contractors.

Israel has objected to paying police because they technically fall under the Hamas-run Interior Ministry.

Hamas continues to defy Western demands to recognise Israel, renounce violence and abide by previous interim peace deals.

Another senior Israeli official monitoring the new flow of funds said the amount of assistance would be sufficient to keep the Palestinian Authority ''at a subsistence level'' -- enough to prevent its collapse but not to end the funding crisis.

EUROPEAN CONCERNS The economic embargo has long been unpopular in Europe and the Arab world, and European leaders feared the Palestinian Authority would collapse under the financial pressure.

Israeli officials said Washington's decision to ease the embargo went part of the way towards addressing the concerns of the EU and key Arab allies Jordan, Egypt and Saudi Arabia.

The Bush administration needs their support in Iraq and to confront Iran over its nuclear programme. It is ready ''to take steps and look the other way'' on the embargo in order to shore up support for a last-ditch peace push, said one senior Israeli official involved in the matter.

With fighting between rival Palestinian factions threatening the unity government, Israeli officials and diplomats said the impact of a US shift on the embargo was unclear.

The sanctions regime, underpinned by Israel's withholding of Palestinian tax revenues, was meant to deprive Hamas of the means to run a government and pay its work force.

But International Crisis Group analyst Mouin Rabbani said US officials appeared to have concluded that sanctions were not their ''strongest card''.

Rabbani said Washington now believed it was more important to ''bolster the credentials of Arab states'' by letting them send money to the Palestinians.

US officials say the embargo on the government itself remains in place. But with funds being funnelled through the PLO account, Fayyad has started paying at least half salaries to members of the Palestinian security forces, dominated by Fatah, in addition to supplementing EU payments to civilian employees.

Much to Israel's chagrin, among the armed contingents receiving partial salaries is Hamas's Executive Force, although it is not clear whether payments are coming out of the PLO account or domestic revenues.

REUTERS DS HT2320