Ehud Olmert, Israel's prime minister, said steps taken by Abbas to rein in armed groups since Hamas's takeover of the Gaza Strip last month could also lead to progress on the diplomatic front, but he offered no details.
Amount in dispute
Israel started withholding tax revenues, which it collects on behalf the Palestinian Authority, on February 1, 2006 after Hamas trounced Abbas's Fatah faction in parliamentary elections in January.
The funds are the main source of funding for the cash-strapped Palestinian Authority.
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Palestinian officials say Israel is holding more than $700m of the tax revenues collected since February 2006.
Israeli officials say the figure is closer to $500m, and that $300m to $400m is all that is available for transfer to Abbas because the rest of the money has been frozen by court order to cover Palestinian debts.
Olmert's spokeswoman Miri Eisin said Israel was resuming the tax revenue transfers to the emergency government set up by Abbas in the occupied West Bank after he dissolved a unity government which included Hamas, last month.
"Israel is committed to working with the new Palestinian government. We hope that together they [Abbas's cabinet] will be able to build a strong administration which will give them a better capability to enter into full negotiations," Eisin said.
Bribery and blackmail
Hamas has called the move "financial bribery" and "political blackmail" meant to stoke divisions after Hamas forces routed Abbas's Fatah faction to seize full control of the Gaza Strip on June 14.
Israel's freeze on tax revenue transfers, coupled with economic sanctions imposed by Western powers, had pushed the Palestinian Authority to the brink of financial collapse and prevented government workers from receiving full wages for nearly a year-and-a-half.
Those sanctions were lifted last month on Abbas's government but remain in place against the Hamas administration in Gaza.
In addition to resuming normal tax revenue transfers of $50m to $60m at the start of each month, Israel said it would transfer all of the accumulated frozen funds to Abbas's government in five or six instalments over the next six months.
Abbas's emergency government plans to make its first salary payments this week.
Fayyad has promised to pay tens of thousands of civil servants working in Gaza as long as they do not follow Hamas's orders.