British Prime Minister Gordon Brown pressed outgoing Prime Minister Ehud Olmert to lift restrictions on the Palestinian economy during talks Tuesday, his office said.

Brown met with Olmert in London a day after hosting talks with Palestinian Prime Minister Salam Fayyad.

Israel is restricting cash shipments to Gaza banks, a tactic aimed at weakening the Palestinian militant group Hamas, which took control of the territory in a violent 2007 coup. But some international leaders fear the blockade is damaging Fayyad's moderate government, and stalling progress on a peace deal.

"It is important that we can establish a stable economy for a potential Palestinian state. A viable Palestinian state relies on having a flourishing private sector," a spokesman for Brown's office said on Tuesday, on condition of anonymity in line with government policy.

"We recognize that restrictions on trade and movement and capital flows have an impact on the development of that private sector," the spokesman said.

The World Bank, International Monetary Fund and international Mideast envoy Tony Blair have sent a joint letter to Olmert demanding action to end the cash blockade.

Cash shipments to Gaza are used by Fayyad to pay around 77,000 government employees loyal to Palestinian President Mahmoud Abbas. On Thursday, Israel transferred NIS

  • 100 million in cash to Gaza banks to enable their salaries to be paid.

    Brown also raised the issue of tensions over Israeli settlement activity. Fayyad has asked European leaders to support his call on Israel not to expand West Bank settlements.

    Foreign Minister Tzipi Livni told the EU this month that it's no longer official Israeli policy to expand settlements in the West Bank and that the government has been trying to reduce them since peace talks restarted last year.

    The prime ministers discussed the issue of settlements and the importance of the Palestinian economy and measures that can be taken to reduce the constraints on the Palestinian economy, Brown's spokesman said.