Israel transfers 120 million dollars to Abbas in first stage

JERUSALEM, July 1 (Reuters) Israel transferred to the Palestinians today a portion of the hundreds of millions of dollars in tax funds it had frozen for 17 months, hoping to bolster President Mahmoud Abbas while isolating Hamas.

Nearly 120 million dollars in frozen tax revenues were transferred in the first instalment -- one sixth of the total that the Palestinians say Israel has been withholding and more than enough to cover one full month's wages to Palestinian Authority workers and pensioners.

Israel will also transfer newly collected tax revenues, expected to total another 50 million dollars, later this week, according to a senior Israeli official.

Israeli Prime Minister Ehud Olmert said steps taken by Abbas to try to rein in militants since Hamas's violent takeover of the Gaza Strip last month could also lead to progress on the diplomatic front, but he offered no specifics.

Israel started withholding the tax revenues, which it collects on behalf of the Palestinian Authority, on February 1, 2006 after the Islamist militant group Hamas trounced Abbas's secular Fatah faction in parliamentary elections in January.

The funds are the main source of funding for the cash-strapped Palestinian Authority.

Olmert's spokeswoman Miri Eisin said Israel transferred the money to the emergency government set up by Abbas in the occupied West Bank after he dissolved a unity administration led by Hamas.

''Israel is committed to working with the new Palestinian government. We hope that together they (Abbas's cabinet) will be able to build a strong administration which will give them a better capability to enter into full negotiations.'' Israel's freeze on tax revenue transfers, coupled with economic sanctions imposed by Western powers, had pushed the Palestinian Authority to the brink of financial collapse and prevented government workers from receiving full wages for nearly a year and a half.

Those sanctions were lifted last month on Abbas's government but remain in place against the Hamas administration in Gaza.

Eisin said the tax money transferred to the emergency government could be used to pay long-overdue salaries, fund development projects and provide public services.

CONFLICTING ESTIMATES Olmert's office has yet to publicly disclose exactly how much Palestinian tax money was being withheld by Israel.

Before today's transfer, Palestinian officials estimated that Israel held at least 700 million dollars.

Israeli officials estimated that figure at closer to 500 million dollars, and said that 300 million dollars to 400 million dollars was all that was available for transfer to Abbas because the rest had been frozen by court order to cover Palestinian debts.

An official in Olmert's office said today's 120 million dollars was the first of six instalments to be spread over the next six months.

The official also said Israel would begin to automatically transfer newly-collected tax revenues worth between 50 million dollars and 60 million dollars a month.

Abbas's government plans to make its first salary payments this week. Prime Minister Salam Fayyad has promised to pay tens of thousands of civil servants working in Gaza as long as they do not follow Hamas's orders.

Hamas has called Israel's release of the tax money ''financial bribery'' and ''political blackmail'' meant to stoke divisions after Hamas forces routed Fatah to seize control of the Gaza Strip on June 14.

Israel and the United States want to isolate Hamas in Gaza while bolstering Abbas in the West Bank.

Olmert said Abbas's orders aimed at banning West Bank militants from carrying arms and curbing Hamas's influence ''certainly help in creating, slowly and carefully, avenues for cooperation between us and them''.

This cooperation, Olmert told his cabinet, ''will ... without a doubt, enable us to make progress on the diplomatic track''.

Reuters KK VP0112