Abbas' adviser Nabil Abu Rudeina said after four hours of talks between the two on Saturday that Hamas had not agreed to make policy changes towards Israel that could alleviate an aid freeze by the US and Europe.

"To our great regret the international community is refusing to deal with us as a whole as long as the government does not change its position. And the people are paying the price," Abu Rudeina said.

He was alluding to Hamas' refusal to accept past peace agreements with Israel or recognise Israel.

Hamas has said it would acknowledge Israel's existence only if the country withdrew from the territories it occupied in 1967, including East Jerusalem, let all Palestinians that fled or were epxelled in 1948 go home, and liberated prisoners. These conditions are unacceptable to Israel.

"The president has been seeking to find the mechanism to end the financial crisis", Abu Rudeina said after the talks held in Gaza City.

"But unfortunately a mechanism has not been reached and there are still obstacles."

Aid freeze

Abbas and Haniya had met for the first time in a month in search of a way out of the crisis triggered when the US and European Union froze direct aid to the Palestinian Authority (PA) after Hamas came to power over its policy toward Israel.

Hamas, which gained much popular support over its anti-Israeli attacks during the intifada, defeated Abbas' long dominant Fatah movement in a January election and formed a government in March.

Abbas met with Haniya
late on Saturday

The monetary freeze, including Israel's refusal to transfer taxes its collects on behalf of the Palestinians to the Hamas government, has created a severe crisis, with the Palestinian government unable to pay salaries to 165,000 public employees since March.

Israel's collection of import duties transiting through its territory and destined for the West Bank and Gaza represented around $50 million – now lost to the Palestinians.

The Hamas-led government said last week the Arab League would cover the civil servants' salaries for the month of March and April.

The money will directly be transferred to the employees' accounts as many local banks are wary of keeping Hamas' accounts for fear of international sanctions.

Terror list

Haniya said "there are many issues that remained unresolved", but he added that he and Abbas had agreed to relieve tensions over security issues, named a panel to hold further talks and would meet again on Sunday.

Last month, Hamas set up a new 3,000-member security force over Abbas' objections but said it would be integrated with the regular police.

The Palestinian population is
heavily reliant on foreign aid

The economic sanctions against the PA have prompted concerns of a possible humanitarian crisis and an escalation of Middle East violence.

Arab countries such as Saudi Arabia, Egypt and Jordan have pressed Washington and other Middle East peace brokers to find ways to continue channelling funds to the Gaza Strip and occupied West Bank.

On Friday, the European Commission offered to continue to funnel funds for basic Palestinian services via Abbas, instead of the Hamas government.

Russian aid

Russia, which has pledged to provide emergency aid, has said it will send $10 million via Abbas for Palestinian education and health.

"To our great regret the international community is refusing to deal with us as a whole as long as the government does not change its position. And the people are paying the price"

Nabil Abu Rudaina,
Palestinian presidential adviser

Haniya has said he would not object to money being transferred through Abbas office so long as it ends up in the Palestinian finance ministry's account.

In other developments, Palestinian medics said Israeli artillery fire on Saturday killed a 60-year-old Palestinian farmer in Beit Lahiya and wounded two people, including an eight-year-old boy.

The Israeli army denied it had fired artillery in the area, though media reports and witnesses in Gaza said earlier the army had shelled Gaza in response to makeshift rockets fired by Palestinian fighters at Israel since Friday.

Israel has stepped up its military strikes on Palestinian fighters since a suicide bombing killed nine in Tel Aviv last month. Five Gaza fighters died in an air strike on Friday.