"There will be no more automatic transfers," said Mark Regev, a Foreign Ministry spokesman. "We are not going to transfer money and have it come back to us in the form of suicide bombers." Zeev Boim, the Housing Minister, added: "With Hamas in power, not even one shekel will be transferred to them." Israel, in common with most international donors, has said it will not co-operate with a Hamas-led government unless the Islamic movement renounces violence and recognises Israel. Israel said that it could transfer the taxes yesterday because the old regime was still in place.
International donors have long complained about the corruption and lack of transparency in the way the economy was managed under the leadership of the late Yasser Arafat's Fatah Party.
Ahmed al-Meghani, the Palestinian Attorney General, accused senior officials yesterday of stealing billions of dollars from public funds. Mr Meghani said he had ordered 25 arrests so far and issued international warrants for 10 other suspects who had fled the country. He declined to identify them while his investigation was continuing, but said the Palestinian oil, tobacco and broadcasting corporations were among those being investigated. He was also trying to find out what became of $6m (£3.4m) invested in a joint water pipe venture by the Italian and Palestinian governments. The company, he said, was never formed.
Israel's gesture was designed to strengthen the hand of Mahmoud Abbas, the Palestinian President, in his negotiations with Hamas, whose leaders would prefer to govern as senior partner in a coalition with his defeated Fatah.
Hamas has honoured an unofficial ceasefire for the past year, but Israel claims that it is still plotting terrorist attacks.
The Shin Bet security service announced yesterday that it had arrested a Hamas activist who infiltrated Israel from Egypt after setting out from the Gaza Strip. The suspect, Ra'ed Zofi, was said to have admitted planning to kidnap an Israeli civilian or soldier as a bargaining chip for the release of Palestinian prisoners.
But the violence continued yesterday as Israeli forces killed the top bomb maker for Islamic Jihad in an air raid in Gaza City, hours after an Israeli was stabbed to death on a mini-bus and Islamic Jihad launched rockets attacks on a Kibbutz.
According to an Islamic Jihad official, Israeli aircraft fired two missiles that blew up two vehicles, killing Adnan Bustan, 28, head of the unit that produces rockets and explosives, and Jihad al-Sawafiri, 31, who led a rocket firing squad.
The bloodshed was the worst since Hamas scored a crushing victory over the dominant Fatah faction in the 25 January election.