The money, from an existing trust fund managed by the World Bank, will be used by the Hamas-led Palestinian Authority to meet its immediate financing needs and to avoid suspension of basic services, the international lending agency said in a statement on Tuesday.
Bank officials said they were awaiting a decision by the quartet of Middle East mediators - the US, the European Union, the UN and Russia - on how any future assistance would be delivered to the Palestinians once a Hamas-led government was formed.
The current funding crisis stems from Israel's decision to freeze tax revenue transfers to the PA starting this month, in a bid to weaken Hamas, which won a 25 January parliamentary election.
The tax revenues, collected by Israel on behalf of the Palestinians, are worth between $50 million and $55 million a month.
As many as one in four Palestinians is dependent on wages from the PA. Last week international envoy James Wolfensohn said violence could break out if salaries were not paid.
David Craig, World Bank director for the West Bank and Gaza, said the money would enable the authority to "maintain economic and social stability in the short term by covering urgent recurrent expenditures such as salaries of civil servants".
But Craig added: "It remains a critical priority for the PA to undertake comprehensive reforms to bring down the deficit to sustainable levels."
"It remains a critical priority for the PA to undertake comprehensive reforms to bring down the deficit to sustainable levels."
World Bank Director
Norway also announced on Tuesday it would provide $10 million to a joint aid package to pay the salaries of PA employees.
The Norwegian funds will be used to help pay teachers in February and March. The European Union, Russia and Saudi Arabia are also contributing to the joint aid package, Norway said.
The World Bank has managed a multi-donor reform fund for the Palestinian Authority since 2004.
The European Commission, France, the Netherlands, New Zealand, Spain and Britain contributed to the $42 million grant announced on Tuesday, the World Bank said.
Palestinians depend on foreign aid totalling more than $1 billion a year.
Palestinians depend on $1 billion
of aid funding annually
It is unclear how much of that money will be frozen by international donors once Hamas completes forming a government which, under Palestinian law, must happen by the end of March.
The Bush administration says US law will forbid it from giving direct assistance to the future PA.
EU officials say the bloc would also stop direct payments to the authority once Hamas takes power unless the Islamic resistance group recognises Israel, gives up armed resistance and accepts existing agreements with Tel Aviv.
A proposal being discussed by Israel and donor nations would funnel most future international aid to the Palestinians through the World Bank.
Expanding the World Bank's role could enable donors to sidestep the government while ensuring humanitarian assistance gets through to the Palestinian people, sources familiar with the proposal said.
Since the start of the second Palestinian uprising against the Israeli occupation in 2000, Hamas has masterminded at least 60 attacks against Israelis where bombers blew themselves up.
But it has largely abided by a truce declared last year.