"Not one dollar of taxpayer money should go to this terrorist organization," Fossella said. "The Palestinian people have every right to elect a terrorist organization to control their government - and the United States has every right to eliminate any financial assistance for it."

Read the full draft of the legislation on Rosner's Domain

The legislation introduced by Ross-Lehtinen and Lantos is broad in reach and scope, and includes measures aimed at strengthening travel restrictions to the U.S. on members or associates of Hamas, integrated into the Palestinian Authority, the Palestinian Legislative Council (PLC), municipalities, and other constituent elements.

Furthermore, the legislation wants the U.S. to withhold contributions to the UN proportional to the amounts the UN provides to such entities or to UN programs with the PA; call for the Palestinian territories to be designated a "terrorist sanctuary," and eliminating the PLO offices in Washington.

"Hamas' continuing violence against Israel and refusal to disarm has been a constant and incendiary impediment to U.S. efforts to promote peace and security in Israel, the West Bank and Gaza. It is, therefore, critical that we prevent U.S. funds from being manipulated for the benefit of Hamas and other terrorist entities," Ros-Lehtinen said.

The bill also seeks to prohibit direct assistance to the PA, the PLC, municipalities and other constituent elements that are "governed" by individuals associated with Hamas or other terrorist entities; audit all committees, offices, and commissions focused on the Palestinian agenda at the United Nations and recommend for their elimination.

“Hamas must refrain from radical statements, recognize Israel’s right to exist, and establish contacts with the international community,” Putin said. “We’re calling upon Hamas to consistently work in that direction.”

However recognizing Israel was just one of the three issues that the international community demands from Hamas in an agreement that Putin has also signed. Hamas has to be committed to three issues — to stop violence, to follow all the agreements signed with Israel and to recognize the existence of Israel.

Israeli authorities cannot accept a position that assesses terrorism in different countries differently.

“Hamas terror actions have killed more than 550 Israelis, many of them of Russian origin. We cannot see the difference between a bus explosion in Jerusalem and a terrorist attack in Moscow or Beslan,” unnamed Israely diplomat was quoted by Kommersant as saying.

They have defeated generals, leaders of nationalist parties, Marxists and feudal barons, subjugating or liquidating clan chiefs, and forcing out or killing ethnic and religious minorities.

It is no use trying to keep predators on a vegetable diet. It is likewise useless to hope that killers and terrorists will change their ways after they come to power. International statements and actions show that nothing has changed since the Munich appeasement, which brought Hitler to power in a more legitimate way than the means employed by Arafat.

The German National Socialist Party won the election no less democratically than Hamas did. The attempts by European politicians to appease the Fuehrer were as naive and helpless as the signals sent by the quartet of international mediators to the new bosses of Palestine the other day.

Hamas did not stoop to tricks in responding to the world community. It does not intend to recognize Israel and will not stop using terror in its struggle against the Jewish state. Hamas leaders reminded the sponsors that Palestinians accepted American, UN and EU money not as charity but as something that rightfully belongs to them. How can the world expect reasonable behavior or elementary gratitude from people who think that the world owes them?

On the other hand, Hamas's position is perfectly logical in view of what the world has given to Palestinians in the past decades and what it has received in response. It is a miracle that they talk with the West at all.

Hamas is not afraid of Israel, the West, or the termination of financing and dialogue. It has the sympathy of Islamists around the world, from the Egyptian Muslim Brothers to the Lebanese Hezbollah, the militants of Sudan's Darfur and al-Qaida fighters. Hamas also has the support of the Iraqi rebels and the drug barons of Afghanistan, as well as Iran.

If the West denies assistance to Palestine, it will nevertheless thrive on the lavish support of "true believers," because the peace process means nothing to the people who view Tel Aviv as an illegal settlement and Israel as a temporary Zionist entity. Hamas is waging a jihad - religious war - against Israel, a war of extermination. Fanatics who train their children to become "walking bombs" have no respect for international conventions and diplomatic rules. The regional nations consider Hamas's victory as proof that Palestinians were right to wage the uncompromising battle.

The peace process has long turned from a diplomatic parody and a theater of the absurd into a genuine war. It is a strange war where the stronger side loses, the aggressor pretends to be the victim, and the attacked side supplies the adversary with electricity, water, jobs and money, retreating step by step and thus strengthening the adversary's belief in his eventual victory.

Israel has not managed to bring about peace by ceding Jerico, Ramallah, Nablus and Gaza to Arafat's control. It has not succeeded in restoring peace by leaving Lebanon and evacuating Israelis from the Gaza Strip. Instead of securing peace, prosperity and future for their children, Palestinians have become hostages to extremists, first secular and now theocratic.

Anyone who examines the situation soberly can see that diplomats' well-rounded formulas do not conceal the fact that the region is heading for another massacre. How many more Palestinians and Israelis have to die to stop the terrorist war, which international bureaucrats who profit from it present as "the Middle East settlement"?

Hamas has offered a ten-year truce to Israel. It is not long enough for Islamists to create a state that Arafat and his successors refused to build. But it is sufficient time for building up strength, liquidating or subjugating rivals, assuming control of money flows, and turning terrorists into an army. They believe that in this period Americans and their allies will leave the region or will be glad to have any partner there, especially because the situation in Palestine offers new opportunities to Islamic radicals in Egypt, Jordan, Lebanon, Syria, Saudi Arabia and Sudan. It will be a time of another trial for the regional monarchs and authoritarian leaders, who have spent decades keeping theocracy away from power. This is why the conversion of Palestine into Hamasstan is terminally dangerous to more countries than Israel.

There are many advocates of dialogue with Hamas in Europe, Russia and international organizations and some in the American and Israeli establishments.

The inertia of political processes, the domination of political correctness over realism, national and international corruption, personal and group interests of officials, lobbying for "Islamic globalization," the Iranian factor, the great powers' battle for influence in the region, as well as party rivalry and political illusions will give the Palestinian Islamists a chance they will most certainly use.

This means that news from the Middle East will remain alarming.

Yevgeny Satanovsky is president of the Middle East Institute.

Palestinian Economy Minister Mazen Sonnoqrot decried what he called Israel's "illegal decision", saying it amounted to "collective punishment" and estimated that as many as 1 million Palestinians would be affected. "This may cause chaos," he said.

Top Hamas leader Ismail Haniyeh, in a Reuters interview, called it "an attack on Palestinian rights".

The United States and the European Union have also threatened to cut off future funding if Hamas does not reject violence and recognise Israel.

Hamas has urged foreign donors to maintain aid but says it could still find alternative sources of funding in the Arab world.

Saudi Arabia and Qatar have pledged to transfer $US33 million ($A43.58 million) to the Palestinian Authority to ease the severe budget crisis, a senior Palestinian government official said.

Saudi Arabia promised $US20 million ($A26.41 million) and Qatar pledged $US13 million ($A17.17 million) in quick aid to help the Palestinian Authority pay January salaries to 137,000 employees, the official said. He spoke on condition of anonymity because the deal has not been finalised.

Earlier, Israeli officials said they were suspending the monthly transfer of millions of dollars in tax and customs revenues to the Palestinians in light of last week's victory of the Islamic militant Hamas in parliament elections.

It dispatched a delegation on a tour of Arab countries to urge them to keep the money flowing.

"The tour will aim to clarify Hamas's position based on its election agenda and to press Arab countries to continue with financial aid to the Palestinian people," said Sami Abu Zuhri, a Hamas leader in Gaza.

Egyptian intelligence chief Omar Suleiman predicted that Iran would step in to fill any financial gap.

In a bid to reassure anxious donors, the Palestinian Authority proposed bringing in an outside auditor or a foreign government to monitor the use of aid money.

Sonnoqrot said talks were also under way with the World Bank and Saudi Arabia about covering the authority's payroll.

Israeli Foreign Ministry spokesman Mark Regev said Israel did not make its scheduled February 1 payment, estimated by the Palestinian Authority at $US55 million ($A72.64 million).

Regev said future payments were also suspended pending a policy review ordered by Prime Minister Ehud Olmert, who took over after Ariel Sharon was incapacitated by a stroke on January 4.

Olmert has called for a boycott of any Palestinian government that includes Hamas, which is sworn to Israel's destruction and has led a campaign of suicide bombings and attacks against Israel.

Hamas, which has largely held to a year-long ceasefire, trounced Palestinian President Mahmoud Abbas's long-dominant Fatah movement in the January 25 parliamentary election.

In Washington, US President George W Bush demanded that Hamas "recognise Israel, disarm, reject terrorism and work for lasting peace" in his State of the Union address.

Hamas leaders said the group would stick to its guns. "Our resistance is legitimate self-defence in the face of aggression," said Zuhri.

An official close to Abbas denied a report from Egypt that he would demand Hamas formally recognise Israel for it join the next government. But the official, who declined to be identified, said the president would insist the new government commit to implementing past agreements with Israel.

The Palestinian Authority faces a financial crunch if Israel continues to withhold the tax money.

Unemployment in the Palestinian territories stands at 22 per cent and half the Palestinian population lives in poverty. In Gaza, many Palestinians live on an average of $US2 ($A2.64) a day.

Israel has long collected customs revenue on behalf of the Palestinians. It is supposed to hand the money over to the governing Palestinian Authority on the first of each month.

The decision to cut off funding came as Olmert sent riot police into the West Bank to remove part of an unauthorised Jewish settler outpost .

In scenes of violence reminiscent of Israel's Gaza pullout last year, ultranationalists at the Amona outpost barricaded themselves in houses and on rooftops, throwing stones at police on horseback who responded with clubs and water cannon.

More than 160 protesters and police were injured before the houses were cleared and demolished.

Earlier, Israeli officials said they were suspending the monthly transfer of millions of dollars in tax and customs revenues while Israel reviewed the issue in light of last week's victory of the Islamic militant Hamas in parliament elections.

"There is a concern on our side that the moneys transferred will come back to haunt us in the form of suicide bombings," Israeli Foreign Ministry spokesman Mark Regev said.

Palestinian officials said Israel's payment for January already is several days overdue and they may not be able to pay the salaries of 137,000 government workers if Israel does not send the money.

Unemployment in the Palestinian areas runs high, and many Palestinian families depend on a government salary. A failure to pay the January salaries could pose the most difficult test yet for Hamas, which has resisted international demands to recognize Israel, disarm and renounce violence.

President Bush repeated the demand Tuesday night in his State of the Union address, saying the "leaders of Hamas must recognize Israel, disarm, reject terrorism and work for lasting peace."

Moussa Abu Marzouk, deputy head of Hamas' political bureau in Syria, told The Associated Press that last year's cease-fire with Israel could be renewed to placate the Western powers.

But he rejected Bush's call.

"These conditions cannot be accepted and the U.S. president should accept the reality, because the Palestinian people have exercised their democratic choice, with mechanisms that are basically Western, and they chose Hamas," Abu Marzouk said, adding Bush "should deal with Hamas as it is."

The EU is first awaiting coalition-building efforts, which officials said could last as much as three months, while making it clear that any future funding to the Palestinian administration would be made dependent on Hamas backing down on its radicalism.

A statement read "The [EU] Council expects the newly elected PLC [Palestinian Legislative Council] to support the formation of a government committed to a peaceful and negotiated solution of the conflict with Israel based on existing agreements and the Roadmap as well as to the rule of law, reform and sound fiscal management."

"On this basis the European Union stands ready to continue to support Palestinian economic development and democratic state building," ministers added.

Fear of radicalisation and Iran influence

Diplomats indicated that an immediate stop of EU funding was not an option, as this would mean a break-down of the Palestinian administration, followed by chaos and fresh violence.

This would undermine EU hopes for a broad coalition government, also involving the moderate Fatah faction led by Palestinian president Mahmoud Abbas.

"We should avoid a situation of chaos, which could lead to an Islamic regime at the heart of the Middle East, or, as someone termed it, a mini-Iran", Dutch foreign minister Bernard Bot told reporters, referring to existing ties between Iran and Hamas.

German foreign minister Frank-Walter Steinmeier suggested according to FT Deutschland that a cut-off of EU funding would create a void for Iran and Saudi Arabia to step in.

"I definitely see a danger that [other] financers will be found, that will fill the gap," Mr Steinmeier indicated.

EU external relations commissioner Benita Ferrero-Waldner stressed that last year, only €70m of the total of €500 EU aid was targeted as direct administrative support to the Palestinian Authority, while the rest did not touch the hands of Palestinian officials and was spent through, for example, United Nations programmes.

Only half of the allotted €70m was actually handed out, the commissioner added, due to insufficient financial safeguards on the Palestinian side.

But Mr Bot indicated the budgetary support for the Palestinian Auithority is crucial, as it involves Palestinian officials' salaries.

Hamas rejects demands

Ursula Plassnik, the foreign minister of Austria which holds the EU presidency, said there is "no timeframe" for assessing whether Hamas complies with EU demands.

But Mr Bot and officials indicated that an assessment was planned in around three months, which is the period Mr Abbas estimates coalition talks could last.

Meanwhile, Hamas on Monday rejected demands by the middle east diplomatic quartet consisting of the EU, the US, Russia and the UN, that it renounce violence and recognise Israel.

"The quartet should have demanded an end to (Israeli) occupation and aggression ... not demanded that the victim should recognise the occupation and stand handcuffed in the face of the aggression," Hamas spokesman Sami Abu Zuhri said according to Reuters.