Palestinian Finance Minister Salam Fayad's plan to use an outside account under his control to collect Arab funds to pay government salaries and other bills may ease a year-old Western embargo, diplomats said on Friday.

But the plan, which hinges on the United States making clear to banks and donors that they can send funds into a Palestine Liberation Organization account, will not in itself fill the Hamas-led Palestinian Authority's funding void nor give it the direct control it seeks over its own finances.

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U.S. officials said they were considering Fayad's request, which, if approved, could send a signal to Arab donors to transfer hundreds of millions of dollars in promised funds.

But Washington said the underlying financial sanctions against the authority remain in place, including a ban on bank transfers.

Western diplomats and analysts said opening the PLO's taps
could be part of a shifting U.S. strategy to elevate non-Hamas members like Fayad within the unity government, and at the same time address Arab demands that Palestinian economic woes be eased as a condition for wider peace talks with Israel.

Israeli officials played down the impact of the change on
Palestinian finances, but warned that it could nevertheless bolster Hamas a little over a month after it formed a unity government with Palestinian President Mahmoud Abbas's Fatah faction in a bid to stop infighting and ease the sanctions.

Under Fayad's plan, the PLO account would effectively
become an external government treasury. The account could pay at least partial salaries as well as contractors in lieu of the government, which would coordinate expenditures through Fayad.

The new account would supplant accounts held by Abbas's office, the main channel open to foreign funds since
Hamas Islamists came to power in March 2006 and Western donors froze direct assistance.

The World Bank and others complained of a lack of adequate financial controls in Abbas's office.