Prime Minister Ehud Olmert will seek cabinet approval today for a proposal restoring normal relations with the Palestinian emergency government headed by Salam Fayad.

Under the proposal Israel will resume the transfer of customs fees and VAT taxes collected by Israel on behalf of the Palestinian Authority but frozen due to the failure of the Hamas-led Palestinian government to accept the international Quartet's criteria.

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"In view of the situation in the Palestinian Authority, it is necessary to implement the appropriate policies vis-a-vis the emergency government and adjust earlier decisions made by the Israeli government," the proposal reads.

The proposal also notes that Israel will continue its policy of refraining from any contacts with Hamas.

Regarding humanitarian concerns in the Gaza Strip, the proposal calls for a continuation of Israeli transfers of electricity, water, food and medical supplies.

The proposal was formulated following deliberations between Olmert, Foreign Minister Tzipi Livni, Defense Minister Ehud Barak and officials in the Finance Ministry. The treasury people will be responsible for a timetable for the transfer of the frozen Palestinian assets.

Yisrael Beiteinu ministers in the coalition government, Avigdor Lieberman and Yitzhak Aharonovitch, are expected to oppose the proposal.

Lieberman declared over the weekend that "it has already been proven that the transfer of guns and funds to Fatah are used to bolster terrorism and not to counter it. Even if we give Abu Mazen [PA Chairman Mahmoud Abbas] F-16s and an aircraft carrier, he is incapable and has no chance."

Meanwhile, Abbas moved ahead with a plan to cut off the cash flow to the Islamic militants by regulating their charities, schools and think tanks.

Abbas on Friday ordered all non-governmental groups, including those allied with Hamas, to obtain new operating licenses, and they now have a week to comply. It was one of his most far-reaching moves against Hamas to date following its takeover of Gaza more than a week ago.

However, heads of NGOs warned that Abbas' decree may be difficult to enforce since the Hamas social network provides vital services in an increasingly impoverished society, often stepping in where the cash-strapped government fails to deliver.

Hamas threat

In Gaza, meanwhile, hard-line Hamas leader Mahmoud A-Zahar was quoted as saying yesterday that his group might carry out bombings and other attacks in the West Bank in response to an arrest sweep there. Dozens of Hamas activists have been arrested by the Palestinian security forces in the West Bank since the Gaza takeover. He also warned that Hamas would go after Israeli spies in Gaza.

The comments by Zahar, a founding member of Hamas, suggested that his group's offer of amnesty to members of the rival Fatah is not ironclad, and that Hamas will try to destabilize the Fatah-controlled West Bank.

Zahar, who is close to the Hamas military wing, spoke in an interview with the German magazine Der Spiegel. His comments were published on the magazine's Web site.

Zahar is widely seen as one of the key players in Hamas' violent takeover of Gaza in mid-June. He staunchly opposed the brief government coalition between Hamas and Fatah and leads the movement's uncompromising wing.

He mention of Israeli spies is seen as a reference to Fatah loyalists close to former Gaza strongman Mohammed Dahlan, who now lives in the West Bank.

Hamas has not set down clear policies since taking over Gaza, and yesterday the top Hamas leader, Ismail Haniyeh, told Egyptian intelligence chief Omar Suleiman in a telephone conversation that he wanted dialogue with Fatah, his office said. Haniyeh affirmed that dialogue is the only way to solve differences, according to a statement from his office.

Haniyeh is scheduled to make a speech today outlining Hamas' positions, his office said.

Yesterday, Egyptian President Hosni Mubarak condemned Hamas' takeover of Gaza and described it as a coup, warning that this could lead to the creation of two Palestinian entities.

In his first remarks since Hamas wrested control of the Gaza Strip, Mubarak reassured Abbas of Egypt's support.

Egypt, Jordan and Saudi Arabia have said the West Bank-based emergency government formed by Abbas following Gaza's fall to Hamas is the sole legitimate Palestinian government. Egypt moved its embassy from Gaza to the West Bank in an apparent sign that Cairo was shunning Hamas officials.