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Leaders of the European Union have rejected a key U.S. demand to cut off funding to Hamas, and to include the civilian-political wing of the organization in the EU's list of terror organizations, along with its military branch.

The White House had presented the Europeans with a list of charitable organizations linked to Hamas, and requested that the EU stem the flow of funding to them. According to reports that reached Israeli sources in Jerusalem, the Palestinian Authority lobbied the EU last week, asking that the freezing of funds to Hamas-linked groups be delayed.

As a result of the Palestinian lobbying, the EU suspended its talks with the U.S., described by one American official as "not easy." The main points of conflict at the talks were relations with Hamas and the treatment of PA Chairman Yasser Arafat.

European leaders discussed links with Hamas at a summit meeting in Thessaloniki some 10 days ago. According to reports emerging from the summit, French President Jacques Chirac "fought with all his might" for Hamas, and objected vehemently to placing limitations on a group "that raises money for charitable causes." Chirac tried to persuade his colleagues that they were misreading the situation, and told them "one day you will have to talk with Hamas."

The U.S. administration has so far failed in its attempts to implement security reforms within the Palestinian Authority, and to make all branches of the Palestinian security services subordinate to Prime Minister Mahmoud Abbas.

In a conversation last week with Egyptian President Hosni Mubarak, President George W. Bush raised the issue of the U.S. demand to transfer 20,000 Palestinian security personnel from Arafat's control to the control of Abbas and his security minister, Mohammed Dahlan. Mubarak rejected the demand, telling Bush "this is not the time - this is the time for a cease-fire."