Ehud Olmert, the acting Israeli prime minister, said on Sunday that Israel would stop the monthly transfer of tens of millions of dollars in tax rebates and other funds to the Palestinian Authority if a Hamas government were installed.
With the latest comments, Israel showed no signs of backing down from the hard line it has taken since Hamas won a landslide victory in Palestinian legislative elections last week.
Olmert, addressing the weekly meeting of his cabinet, said he had been in touch with leaders around the world in recent days and received support for the tough Israeli stance against Hamas.
"We clarified that without a clear abandonment of the path of terror, a recognition of Israel's right to exist in security and peace ... Israel will not have any contact with the Palestinians," Olmert said.
"These principles are accepted by the international community. On this issue, I do not intend to make any compromises."
Hamas refuses to disarm or recognise Israel, though it has hinted that it could reach a long-term truce or some other accommodation with the Jewish state.
Olmert spoke in advance of the arrival of Angela Merkel, the German chancellor, who was making a 24-hour visit for talks with Israeli and Palestinian leaders. She said she would not meet Hamas members.
Israeli officials said its ban on contacts did not apply to Mahmoud Abbas, the Palestinian president, who accepts the Israeli conditions and is eager to resume peace talks.
Abbas was elected to a four-year term last year and remains in power.
Olmert (R) says he has received
support for his stance on Hamas
However, Olmert said Israel would not hand over value added tax and customs funds it collects on behalf of the Palestinians if a Hamas government were installed.
Every month Israel transfers an average of 250 million shekels ($54 million) collected at ports and border crossings. In the past Israel has held up the transfers during times of tension. A delay would cripple the cash-strapped Palestinian government.
During the cabinet meeting, Shaul Mofaz, the Israeli defence minister, said Hamas "is portraying policies of responsibility". He said the group had even tried to restrain "suicide attacks" by the Islamic Jihad group.
Prepared to kill
But earlier, Mofaz said Israel was prepared to kill Hamas fighters if the group resumed its attacks.
"Those who head terror organisations and continue to engage in terror against the state of Israel will be liquidated," he told Channel 2 TV on Saturday night.
During five years of fighting with the Palestinians, Israel assassinated dozens of Hamas leaders in air raids, including the group's founder and spiritual leader, Shaikh Ahmad Yassin. Israeli warplanes killed him as he was leaving the mosque on his wheelchair.
Since a ceasefire declaration last February, Hamas has not claimed involvement in an attack and Israel has not killed any of the group's leaders.
Mofaz (R) says Israel is ready to
kill Hamas fighters if necessary
Abbas, whose Fatah Party was routed in last week's election, has asked Hamas to form a new government.
Abbas must now find a way to work with the religious leaders.
The arrangement could potentially put Hamas in charge of some, if not all, of the Palestinian security forces.
Abbas in the past has called on Hamas to disarm, as required in the US-backed "road map" peace plan, but never took action against the group.
Khalid Mishaal, Hamas's supreme leader, said on Saturday that the group would not disarm, but suggested that it could fold the thousands of fighters in its armed wing into a Palestinian army.
"We are ready to unify the weapons of Palestinian factions, with Palestinian consensus, and form an army like any independent state," he said, speaking from exile in Syria.
Mishaal survived an Israeli assassination attempt against him in late 1990s, when Israeli agents attacked him in Amman, Jordan.