However, the EU kept silent on what it would do once the militant organisation assumes power.
Announcing the grant, Philippe Douste-Blazy, the French foreign minister, said the aid funds were required to avoid "economic chaos".
The European Commission has urged donor countries, which suspended Palestinian aid after Hamas's election victory last month, to follow suit.
Earlier, James Wolfensohn , international envoy, warned that the Palestinian Authority faced financial collapse within two weeks because Israel has stopped reimbursing millions of dollars in customs duties.
He said a financial crisis could lead to violence and chaos and urged the main international powers to develop an urgent strategy to address the Palestinian administration's plight.
Wolfensohn, a former president of the World Bank, and appointed special envoy for Israel's pullout from the Gaza Strip, made the charge in a letter to the so-called quartet, of the European Union, Russia, the United Nations and the United States.
"The failure to pay salaries could have wide-ranging consequences not only for the Palestinian economy but also for security and stability for both the Palestinians and the Israelis," he said.
About 140,000 people are on the Palestinian Authority payroll, including 58,000 security personnel.
Wolfensohn (L) said a financial
crisis could lead to chaos
Announcing the grant the EU said the move was designed to show that European support for the Palestinians remains undiminished, at least until Hamas - which won the 25 January Palestinian elections - assumes power.
While both the United States and the EU consider Hamas a terrorist group, Washington has been seeking support from Arab allies such as Saudi Arabia and Egypt for a financial boycott of Hamas as it takes control of the Palestinian parliament.
Condoleezza Rice, the US secretary of state, however, found no backing for that on a tour of the region last week.
For its part, the EU is taking a wait-and-see attitude.
Benita Ferrero-Waldner, the EU external relations commissioner, said: "We need to have some patience now.
"Later on, we'll have to decide what comes next."
"We need to have some patience now... Later on, we'll have to decide what comes next"
EU external relations commissioner
Ursula Plassnik, the Austrian foreign minister, whose country now holds the EU presidency, said the grant did not change the EU demand that Hamas must "accept the principles of non-violence, [and] recognise Israel's right to exist".
He also called on the group to respect existing accords that the Palestinians and Israel have reached over the years.
Raanan Gissin, a senior Israeli government official, however, said the aid was bound to reach Hamas militants, pledged to Israel's destruction, adding it would have been better had
they been sent directly to humanitarian organisations.
"It's the wrong decision at the wrong time, to the wrong address," he told The Associated Press in Jerusalem.
"In a couple of weeks ... Hamas will be in government. They will be heading ministries to which this 120 million euros is going to go. What kind of assurance do the Europeans have that this money will be used only for humanitarian purposes?"
Israel has imposed a freeze on the payment of customs duties which it collects on behalf of the Palestinian Authority on imports to the West Bank and Gaza Strip that transit through its territory.
58,000 security staff are on
the Palestinian Authority payroll
Sami Abu Zuhri, a Hamas spokesman in the Gaza Strip, said the EU grant showed the failure of "American-Israeli efforts to tighten the economic siege on the Palestinians and the incoming government."
The emergency EU aid package will pay bills for two months and comprises:
- $48 million to pay for the authority's energy and other essential utility bills. These bills will be paid by the EU directly to the utilities, based on invoices validated by an international audit firm.
- $76 million for health and education projects to be paid to the United Nations Relief and Works Agency, which provides education, health care, social services and emergency aid for Palestinians in the Gaza Strip and the West Bank.
- $21 million for salaries of Palestinian Authority workers. This money will come from $83 million the EU paid into a World Bank trust fund in 2005, but of which only half was spent as the Palestinian Authority missed key good governance goals last year.