The US and the European Commission suspended direct aid on Friday to Ismail Haniya's new government until Hamas gives up its armed resistance to the occupation and recognises Israel.

Hamas, which came to power in elections in January, maintains that the Palestinians have the right to defend themselves against Israel.

Hamas does not accept that Israel has a right to exist.

Haniya said on Saturday: "The attempts to strangle the government have one aim. They will not extract political concessions from us that will harm the rights of the Palestinian people."

Haniya was speaking at the opening of a children's art exhibition.

Background

Since taking office last week, relations between Haniya and Mahmoud Abbas, the Palestinian president, have been tense. At issue are Abbas's powers, as well as Israel violence that has prompted vows of revenge by Hamas's armed wing.

Tensions remain between Haniya
(L) and Mahmoud Abbas

Hamas has largely abided by a year-old truce with Israel and kept a lid on its rhetoric in recent months.

In the deadliest Israeli attack in five months, missiles hit a car leaving a militant training base in the southern Gaza Strip on Friday, killing five resistance fighters and the five-year-old son of one of them.

Khaled Abu Hilal, a spokesman for the Hamas-controlled interior Mministry in charge of security matters, said he supported calls by Hamas's armed wing to avenge the air strike.

"Our people have the right to keep the arms of resistance and to respond to the aggression," he said. "We understand the need of our fighters for training bases to rebuild themselves. We will secure that."

Financial worries

Haniya and Abbas failed to resolve a dispute over powers in talks on Friday night over Abbas's decisions this week to assume control of Gaza's border crossings and make a high-level security appointment.

In an interview with The Guardian newspaper in Britain, Abbas said any attempt by Israel to set its borders unilaterally would delay rather than solve a resolution to the conflict.

"After 10 years, our sons will feel it is unfair and they will return back to the struggle," he said.

Israel wants to determine its
borders using the separation wall

Despite the aid cuts, the United States said in its announcement in Washington it would boost humanitarian assistance to the Palestinians through UN agencies to avoid widespread economic distress in the West Bank and Gaza Strip.

The cuts have left Haniya's new government scrambling to find ways to pay 140,000 workers employed by the Palestinian Authority who support about a third of the population of 3.8 million in the territories.

In the West Bank, merchants complained of an increase in the number of bounced cheques. Government employees began tightening their belts in the expectation that their salaries would not be paid this month.

Hamas has appealed to Arab states and Iran to fill the shortfall, but has not even been able to find a bank willing to handle its finances.

Debt and unemployment

Even before the aid cut-off, many Palestinians struggled in an economy suffering from widespread poverty, high unemployment and corruption.

Israel has stopped handing over about $50 million a month in taxes and customs revenue it collects on behalf of the Palestinians under previous agreements and its banks have begun cutting ties with the Palestinians.

Diplomats said the European freeze covered all direct aid to the Palestinian government and payment of public employees' salaries with EU funds through the World Bank, but not humanitarian aid through non-governmental organisations.