Olmert's office pointedly refused to comment on the Fayyad-Walles meeting. As consul in Jerusalem, Walles serves as the de facto US ambassador to the Palestinian territories.

The main question was whether the meetings would lead to restoration of vital foreign aid, which has made up half of the Palestinian budget. The cutoff bankrupted the Palestinian treasury and left tens of thousands of public service employees, including armed security officers, unable to make ends meet. Palestinians say the economic malaise was a key factor behind the outbreak of internal violence that killed more than 140 in Gaza in recent months.

Israel charges that the new government's guidelines do not explicitly recognize Israel, foreswear violence or accept previous peace accords - the three Western conditions for restoring the funding. Palestinians say recognition of Israel is implicit, and Abbas has said the deal, negotiated in the Islamic holy city of Mecca, Saudi Arabia, was the best he could get from Hamas.

First cracks in the Western boycott emerged just hours after the new Palestinian Cabinet took office on Saturday.

Norway, traditionally an important diplomatic player in Israel-Palestinian relations, quickly recognized the new government and sent Deputy Foreign Minister Raymond Johansen to meet Prime Minister Ismail Haniyeh on Monday in Gaza. He was the first high-ranking Western official to visit leaders of the radical Islamic movement, which has killed more than 200 Israelis in dozens of suicide bombings over the past six years.

On Tuesday, Johansen said Israeli officials canceled planned meetings with him. "We understand that this is a sensitive issue, but we had hoped it was possible to see them and for them to discuss and also voice their concerns to us," Johansen told The Associated Press by telephone at the end of his trip.

Israeli Foreign Ministry spokesman Mark Regev said the Israeli Cabinet decided after Hamas' January 2006 election victory to bar visitors who meet Hamas members from seeing Israeli officials.

1

2