Palestinian government broke: Hamas PM

GAZA (Reuters) - Prime Minister Ismail Haniyeh told the first full meeting of his Hamas-led cabinet on Wednesday that the Palestinian government was broke and urged the international community not to slash aid.

"The Ministry of Finance has inherited an entirely empty treasury, in addition to the debts of the ministry and the government in general," said Haniyeh, who is also a senior leader of the Islamic militant group.

The government is facing Western isolation and cuts in aid to the new administration unless it recognizes Israel, renounces violence and accepts interim peace accords.

Haniyeh said the government would do its best to pay salaries to the Palestinian Authority's 140,000 employees despite a cash crunch caused in large part by cuts in Israeli tax revenue transfers following Hamas's election win in January.

Hamas has previously expressed confidence it would make up for any cash shortfalls with aid from Iran and other Muslim nations. Haniyeh gave no figures on the Authority's debts.

Israel calls Hamas a "terrorist" organization and has vowed not to negotiate with the group.

Hamas has offered a long-term truce if Israel was to fully withdraw from lands it occupied in the 1967 Middle East war, but Hamas officials have said the militant organization could never recognize the Jewish state.

Israel will move closer to forming its own new government on Thursday when President Moshe Katsav asks interim Prime Minister Ehud Olmert to form a coalition administration, the presidential office said in a statement.

Olmert's centrist Kadima party won most seats in elections last week, but not a majority.

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Speaking by video-link with ministers in the West Bank city of Ramallah because of Israeli travel curbs on senior Hamas officials, Haniyeh said he wanted government employees to get their salaries before ministers in the cabinet.

March wages were supposed to be paid earlier this week.

Haniyeh also condemned recent Israeli air strikes and shelling in the Gaza Strip. Israel has said it was responding to the repeated launching of makeshift rockets at the Jewish state by Palestinian militants.

Hamas is sworn to Israel's destruction and has vowed to keep fighting the Jewish state since taking over the government a week ago. It says talks with Israel would be a waste of time.

The "Quartet" of Middle East mediators -- the United States, the European Union, the United Nations and Russia -- has threatened to cut direct aid to the Palestinian Authority if Hamas does not recognize Israel or forswear violence.

But it is unclear how much of the more than $1 billion a year that the Palestinians get in foreign aid will be withheld now that Hamas has taken control.

Haniyeh said the new government would work with Arab countries and other donors to meet "the needs of our people" by paying salaries and creating jobs. He offered few details.

NEW ISRAELI GOVERNMENT

The statement from Katsav's office said the Israeli president would meet Olmert on Thursday and then announce he had asked the interim leader to form the government. Olmert will have 42 days to complete the task.

Speaking with Kadima's new parliamentary faction, Olmert said a majority of legislators wanted him to be prime minister.

"Only the chairman of Kadima can create a government in Israel. I will make a great effort to complete the process as quickly as possible," Olmert said.

Kadima won 29 seats in the 120-member parliament in the March 28 elections, less than expected, on proposals to impose Israel's final borders with or without Palestinian agreement.

The Palestinians condemn Olmert's plan as a land grab.

(Additional reporting by Mohammed Assadi in Ramallah and Dan Williams in Jerusalem)