Qatar-based Sheikh Yousuf Qaradawi has allocated $21 million to a charity funded by Hamas to allow the Palestinian group to buy land and set up infrastructure in Jerusalem, Shin Bet chief Yuval Diskin said on Sunday.

Qaradawi, an 82-year-old Egyptian-born Muslim scholar with strong links to the Muslim Brotherhood, is a keen supporter of suicide bombings in Israel, which he describes as "martyrdom operations.

Abbas aide Rafiq Husseini dismissed the report. "We wish there was Arab money to buy threatened houses," he told The Associated Press, "but that's not the case." Qaradawi could not be reached for comment.

Diskin made the comments during the weekly cabinet meeting in Jerusalem. He also told the ministers that the Palestinian Authority and its security forces have been working actively to thwart the sale of Palestinian land to Jews, particularly in East Jerusalem.

He added that Hamas was placing political and diplomatic moves higher on its agenda. Diskin said public statements by senior Hamas officials show the militant group's efforts to portray itself as interested in an end to the conflict with Israel.

The officials say they seek a Palestinian state along the pre-1967 borders in exchange for a long-term hudna, or ceasefire, Diskin said.

"This is not because of an abandonment of fundamental ideological values," he noted. "Hamas' move toward to the political theater is designed to challenge the sole leadership of Abu Mazen [Mahmoud Abbas]."

The security service chief also told ministers that there had been a steady trickle into Gaza of foreigners linked to global jihad.

Diskin did not elaborate or cite evidence.

Gaza's Hamas interior minister Fathi Hamad dismissed Diskin's charge as baseless propaganda. The militant group Hamas controls the Gaza Strip.

He added that there is no Al-Qaida or any other organization in Gaza.

The Shin Bet chief's briefing came after it emerged that the United States has demanded Israel halt a construction project in East Jerusalem, which would see a hotel converted into housing units.

The Jerusalem municipality said it signed a deal for the project under completely legal terms, and Prime Minister Benjamin Netanyahu reiterated Sunday that Jerusalem would not be included in any discussion on settlement construction.

But the PA responded harshly to Netanyahu's declaration, saying peace was impossible without Jerusalem as a Palestinian capital.