European Union officials said Thursday it was still too early to
decide whether to resume direct aid to the Palestinian government, but diplomats said the union was studying the option of funneling funds through a pro-reform official due to head its finance ministry as a first step towards restoring direct aid.

"Another possibility being studied is broadening an existing mechanism for delivering purely humanitarian relief to include direct payments to the Palestinian government," they said.

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Along with the United States and Israel, the European Union suspended direct aid to the Palestinian government last year after Islamist Hamas, which it considers a terrorist group, beat the moderate Fatah in an election.

The EU has stepped up humanitarian relief to Palestinians, but a Saudi-brokered pact that led to a deal on a unity cabinet with pro-Western reformer Salam Fayyad as finance minister raised the prospect of channelling direct aid through him.

"One possibility is giving aid to the minister of finance. We think the EU will have to work selectively," said one EU diplomat, speaking on condition of anonymity.

Fayyad's name was on the list of ministers which Prime Minister Ismail Haniyeh of Hamas handed to Palestinian Authority Chairman Mahmoud Abbas of Fatah on Thursday, and which will be submitted to parliament for approval on Saturday.

Fayyad was finance minister from 2002-2005 when the government was controlled by Fatah, using his term to initiate reforms of the financial system and to fight corruption.

The Quartet of Middle East mediators - the United States, Russia, the European Union and the United Nations - has called for a future government to renounce violence, accept Israel's right to exist, and recognise past peace accords.

Israel warned the EU last week against softening its terms for restoring cooperation with the Palestinian government.

The Saudi-brokered Palestinian unity deal contains a pledge to "respect"
Israeli-Palestinian agreements but does not commit the incominggovernment to abide by those pacts, nor to recognise Israel or renounce violence.

However France has pressed for restarting cooperation and Britain is interested in exploring options for restarting aid.

"As we have said many times, we are going to wait and see," EU foreign policy chief Javier Solana told reporters at an EU event in the German city of Nuremberg, saying he had just discussed developments with Abbas by telephone.

The European Commission, which last year helped create the "temporary international mechanism" (TIM) aimed at maintaining relief to the most needy Palestinians, hailed Fayyad's record but said any new decision on aid would be premature.

"Certainly we will not be taking any decisions before we have been able to judge the programme and actions of the new administration," Emma Udwin," spokeswoman for EU External Affairs Commissioner Benita Ferrero-Waldner, said.

EU diplomats believe a restart of European aid is all the more pressing given the slim chance of the United States taking the controversial step at home of lifting its boycott on the Palestinian Authority as it readies for elections next year.

But doubts remain over whether using Fayyad as the conduit for the aid is the answer, with questions over the institutional capacity of his ministry to handle the funds and in particular ensure they are kept out of Hamas' hands.

Some countries, including Britain, favour an alternative idea under which the TIM would be adapted to allow it at some point to be also used for direct transfers for the government.

"But that would be subject to a separate political judgment of when we were ready to work with them," said one EU diplomat.

EU foreign policy chief Javier Solana on Thursday welcomed the formation of a unity government but also said the international community needed more time to evaluate its positions.

"As we have said many times, we are going to wait and see. ... There are many important things taking place now," Solana told reporters outside a meeting of foreign ministers from the EU and Southeast Asian countries in Nuremberg, Germany.

Solana said he spoke by phone Wednesday night with Abbas about the formation of the new government.

Solana said more diplomatic efforts were planned. He mentioned a March 28 Arab League summit and another meeting of the Quartet of Middle East mediators that he said would probably take place in mid-April in the Middle East.

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