German Chancellor Angela Merkel on Saturday urged the new Palestinian unity government to embrace Western demands it recognize Israel and renounce violence to revive Middle East peace talks.

Merkel arrived in Israel Saturday evening for a meeting with Prime Minister Ehud Olmert.

"We call on the members of the unity government to adhere to the Quartet principles ... to bring forward the peace process," Merkel told reporters at a news conference with Jordan's King Abdullah at the start of a Middle East tour.

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"We want to support those forces that abide by the Quartet principles," she said.

But Hamas insisted it would not recognize Israel or renounce violence.

"We stress that we do not and will never recognise the right of Israel to exist on one inch of Palestinian land," Hamas spokesman Fawzi Barhoum said.

"We will not abandon the resistance to the Zionist occupation until the liberation of all Palestinian soil," Barhoum said.

Earlier Saturday, the European Union pledged to work with Palestinian Authority Chairman Mahmoud Abbas and other relative moderates to support an Arab initiative that Europeans see as a hopeful sign in the Middle East peace process, officials said Saturday.

"EU foreign ministers ended a two-day meeting determined to stay fully engaged in the search for Mideast peace," said Cristina Gallach, the spokeswoman for EU foreign affairs chief Javier Solana.

Also Saturday, Solana said that developments in the Middle East are pointing toward a comprehensive peace agreement between Israel and the Arab world for the first time in decades.

"The Arab League for the first time in many years has assumed the responsibility to be more active in the peace process," he said.

"If you put that together with the reaction of Prime Minister Ehud Olmert, the two things ... are beginning to construct the dynamic that could lead to the settlement of a crisis that has been with us for many years," Solana said.

Olmert told Haaretz in an interview that he wants to start a dialogue with Saudi Arabia and other moderate Arab countries after the Riyadh summit again ratified the initiative. Olmert said he would be happy to take part in a regional conference that would support direct negotiations between Israel and the Palestinians.

Solana, who attended last week's Arab League summit in Riyadh, Saudi Arabia, praised the hosts for assuming a leadership role in reviving a 2002 Arab peace initiative.

"I think after the meeting in Riyadh (Arab nations) will be constructive and active in moving the peace process forward," he told reporters at the end of a meeting of EU foreign ministers.

"The moment in which we are living is a moment of hope that we may be able to move the process of a comprehensive peace forward," he added.

Gallach said the EU sees an initiative this week by the Arab League to relaunch a 2002 Arab peace initiative as a sign of new momentum in the peace process.

The EU ministers, meeting in Bremen, also agreed to keep in place, for now, an ad-hoc aid scheme, overseen by the World Bank, that in the past year has funneled hundreds of millions of euros directly to poor Palestinians - bypassing the previous Palestinian government led by the Islamic militant Hamas.

The emergence of that government a year ago led international aid to the Palestinian Authority to dry up. The EU cobbled together a so-called Temporary International Mechanism that hands out monthly cash payments to support 150,000 or so destitute Palestinian families.

The platform of a recently formed government of national unity, a coalition between Hamas and Abbas' more moderate Fatah faction, falls short of international demands that it recognize Israel, renounce violence and abide by existing Palestinian-Israel agreements.

But on Saturday, the Europeans agreed they will judge the new government by its actions rather than its words and to progressively help it build up credible government institutions, Gallach said.

The EU will limit its dealings to relative moderates such as Abbas, Foreign Minister Ziad Abu Amr and Finance Minister Salam Fayyad.

The latter is a respected economist and former International Monetary Fund executive who earned the trust of the U.S. administration in his first term as the Palestinian treasury chief before Hamas came to power in 2006.

The EU is interested in seeing an early meeting of the so-called Quartet of peace negotiators - the United States, the EU, the United Nations and Russia. At the same time, officials said, the EU will increase contacts with the so-called Arab Quartet of Saudi Arabia, Egypt, Jordan and the Emirates.

This week, the Arab League revived a 2002 initiative that calls for full recognition of Israel by the Arab world in return for an Israeli withdrawal from territories captured in the 1967 Six Day War and a just solution for Palestinian refugees.

Despite an official freeze of aid to the Palestinian government in the past year, international assistance to the Palestinians has risen in the past year.

The EU alone has given some $932 million - almost half of it in cash handouts to poor Palestinians and the remainder though the United Nations and other relief groups.

That has left the Palestinian treasury empty. Fayyad, the new finance minister, has said it will take him four to six months to rebuild the sound finances and budgeting practices that existed before Hamas took power.

Merkel: No grounds for optimism in Middle East
Merkel said earlier Saturday that the future of the Middle East is not particularly optimistic, shortly before setting off for a three-day tour of the region.

"The situation is ... difficult," Merkel acknowledged before her departure. "But on the other hand, plenty has started moving - particularly because of the Arab countries' activities. We now have to sound out to what extent we can also make out of this movement for the peace process in the Middle East - although I think we still have a very, very difficult road ahead of us, so we don't yet have grounds to be particularly optimistic."

Her trip will include talks with Abbas and Olmert, meetings that will come close on the heels of Thursday's Arab League summit in Riyadh, Saudi Arabia. The meeting called for Israel to accept a revived peace plan.

Merkel's first stop is in Jordan, where she will see Jordan's King Abdullah - one of the strongest supporters of the Arab plan.

German officials called the recent Arab statements a sign of new momentum in the intractable Israeli-Palestinian dispute after swings through the region by U.S. Secretary of State Condoleezza Rice and UN Secretary-General Ban Ki-moon.

"After the Arab move, we now have to sound out to what extent we can also make out of this movement for the peace process in the Middle East," she said.

"But everything must be done so that this peace process moves forward," she said.

EU ministers mull Arab peace plan, Palestinian unity gov't
EU foreign ministers on Saturday assessed prospects for Middle East
peace based on a Palestinian government comprising the rival Fatah and Hamas factions and a revived Arab peace initiative.

German Foreign Minister Frank-Walter Steinmeier praised Saudi Arabia for helping put together a Palestinian national unity government and for relaunching a 2002 peace initiative at this week's Arab League summit in Riyadh.

"A number of Arab partners have acted constructively in furthering the peace process," Steinmeier, whose country holds the EU presidency, said as he arrived at the meeting.

"We shouldn't let this opportunity evaporate again," Luxembourg Foreign Minister Jean Asselborn said.

Crucial for the EU now are the intentions of the new coalition government between Hamas and Fatah.

Solana, who was scheduled to brief the EU ministers on the outcome of this week's Arab League summit, told the European Parliament this week he will recommend the EU governments judge the new Palestinian government by its deeds and maintain contact with moderate elements in the national unity government.