Samir Abu Eisheh, the interim finance minister, said on Thursday that the Palestinian government had signed a contract with Paz, a private Israeli company, to replace Dor Alon, the firm which has provided fuel to Gaza and the West Bank for 12 years.

"We signed the agreement several days ago after more than four months of negotiations," Abu Eisheh said

The deal comes despite the Israeli government's refusal to deal with the Hamas-led administration, headed by what Israel and many Western countries consider a terrorist organisation.

"We negotiated with three companies, including Dor Alon, and we managed to improve the terms of the contract in reducing the margin of the new supplier which will begin supplies at the start of next year," Abu Eisheh said.

Interrupted supplies

A Paz spokeswoman confirmed that the contract had been signed and would come into effect in January 2007.

Abu Eisheh said the contract would allow the Palestinian treasury to save $17m a year over the terms of the old contract with Dor Alon.

Dor Alon has frequently interrupted supplies owing to unpaid bills by the Palestinian government, which is on the verge of bankruptcy due to the suspension of aid and Israel's decision to withhold millions of dollars in taxes.