Israel is prepared to transfer withheld tax revenues to the Palestinians through a mechanism that guarantees none of the money will go to the Hamas-led government or militants, Israeli officials said on Thursday.

The officials, speaking on condition of anonymity, said the United States and European Union have been discussing the issue and that Israel would be ready to release funds once a mechanism with sufficient safeguards were agreed upon and put in place.

Israel has long resisted European calls to transfer Palestinian tax revenues, now totaling some $700 million, to stave off collapse of the Palestinian Authority and bolster PA Chairman Mahmoud Abbas, whose Fatah faction has been locked in a power struggle with the dominant Hamas.

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But Israel finds itself increasingly isolated on the money issue. The United States joined the EU, United Nations and Russia in a statement on Wednesday encouraging Israel to consider freeing up the funds through a special European Union mechanism.

The Temporary International Mechanism provides direct payments to the Palestinian Authority's non-security work force, bypassing the Hamas-led government.

"We're not against releasing the funds. We're prepared to transfer them," an official in Prime Minister Ehud Olmert's office told Reuters. "But we need a mechanism to make sure the money doesn't go to the terrorist organizations and the government in which Hamas participates."

"Nobody is against giving funds to the Palestinian president for humanitarian purposes, such as paying doctors, nurses and teachers, whatever is needed on the humanitarian level," the official said. "But they haven't found the mechanism."

Some Israeli officials decried what they saw as a shift in U.S. policy that would reduce pressure on Hamas to recognize Israel, renounce violence and accept interim peace deals.

But they said Olmert, who was expected to travel to Washington next month for talks with U.S. President George W. Bush, may have little choice but to go along.

Israel released $100 million in tax to Abbas earlier this year. But Israeli officials later complained that the Palestinians violated agreements on how the money was to be spent, casting doubt on future transfers.

Olmert will meet with Abbas next week.

Israel stopped transfers of the tax revenues after Hamas won parliamentary elections in January 2006.

Western powers banned direct aid to the Palestinian Authority when Hamas took office in March 2006, preventing the government from bringing in enough money to pay full salaries.

Washington however has recently shown signs of flexibility on the money issue as it struggles to revive Israeli peace moves with Abbas and Arab states.

Earlier this month, the Bush administration gave European and Arab donors a green light to start transferring funds to a Palestine Liberation Organization (PLO) account controlled by Palestinian Finance Minister Salam Fayyad.

Some Israeli officials have questioned whether the EU mechanism and the PLO account have sufficient safeguards to ensure Hamas and its members do not benefit.

In recent months, the Bush administration has privately urged European and Arab states to provide funding directly to members of Abbas' security forces. "This is something the Americans are pressing us to do," said a senior European official who asked not to be identified.