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Condoleezza Rice said the U.S. would allow humanitarian aid to be channeled to the Palestinian Authority through the office of Chairman Mahmoud Abbas, MK Avital Colette (Labor) told Haaretz after a joint meeting with the Secretary of State in Washington on Friday.

Avital, who is in Washington on behalf of a women's rights organization, said Rice told her the aid will be used to fund Palestinian education and health programs.

According to the Labor MK, Rice notified Abbas of the decision in a phone conversation and will tell the other Quartet members of the decision in a Tuesday meeting with UN Secretary General Kofi Annan.

During the meeting with Avital, Rice told her the U.S. prefers negotiations between Israel and the Palestinians over further unilateral withdrawals and that Washington will launch a new peace initiative after Prime Minister Ohud Olmert's planned visit to Washington in a few months from now.

Earlier on Friday, a Western diplomat involved in talks with the U.S. on this issue said Washington had rejected a proposal by the European Commission to use PA Chairman Mahmoud Abbas as the interface for transferring foreign aid to the PA while bypassing the Hamas government.

According to the diplomat, the U.S. had also blocked separate aid transfer proposals by Britain, France and the Arab League, in the belief that an aid cutoff will prompt Palestinians to rebel against the Hamas government. Yet even as it blocks humanitarian aid to the PA, Washington supports aid to Force 17, a PA security force that reports to Abbas, the diplomat said.

Meanwhile, Russia channeled $10 million to Hamas-led PA on Thursday due to the humanitarian crisis.

The European Commission proposal, a copy of which was obtained by Haaretz, calls for transferring aid earmarked for specific purposes, such as health and education, via Abbas. According to the document, the World Bank has already begun informally examining whether existing fund transfer mechanisms are sufficient for this purpose, or whether a new apparatus should be set up.

It would not be difficult to ensure that funds earmarked for health are not diverted to Hamas, the document argued, because they will be distributed to known health care professionals and hospitals. A similar system could also be used to fund the PA education system, but donor states would have to monitor any changes in the curriculum, it added.

According to the document, one of the goals of setting up this system would be for Israel to utilize it as well. Israel is currently refusing to transfer the taxes that it collects on the PA's behalf, for fear that the money will fall into Hamas' hands. But the commission hopes that Israel would resume the transfers if it were assured that the money was being spent directly on humanitarian needs.

If the current freeze on aid continues, the document warned, there will be a sharp rise in unemployment and poverty in the territories within two to three months, and perhaps a consequent breakdown in law and order as well.

A separate document by a collection of human rights organizations, which was published Thursday, warned that the health situation in the territories is deteriorating rapidly. Some 10 percent of children under five are suffering from inadequate nutrition, this report said, and there has been a 30 percent rise in the mortality rate among children in this age group.

Bush says U.S. will not deal with HamasU.S. President George W. Bush said Thursday the United States would not waver in its commitment to the security of Israel and would have no contact with Hamas leaders of the Palestinian government until the militant group recognizes Israel.

"Democratically elected leaders cannot have one foot in the camp of democracy and one foot in the camp of terror," Bush said at the 100th anniversary gala of the American Jewish Committee in Washington, repeating a theme of his administration since Hamas' election to head the Palestinian Authority in January.

He also said the United States and the international community were concerned with Iran because it was repressing its people, sponsoring "terrorists," destabilizing the region, threatening Israel and had nuclear weapons ambitions.

"America's commitment to Israel's security is strong, enduring and unshakable," Bush said.

"Hamas has made it clear that they do not acknowledge the right of Israel to exist, and I made it clear that so long as that's their policy we will have no contact with the leaders of Hamas," he said to applause.

The Hamas-led government has been unable to receive funds from abroad because banks fear sanctions by the United States, which regards Hamas as a terrorist organization.

"Hamas must accept the demands of the international community to recognize Israel, disarm and reject terrorism, and stop blocking the path to peace," Bush said.

Bush introduced German Chancellor Angela Merkel, whose remarks at the event were a symbolic first for someone in her political position.

"I know that this is anything but a matter of course for a chancellor of the Federal Republic of Germany to be invited to address you here tonight," Merkel said.

She said that in a few days it would be 61 years since World War Two ended "and the world was liberated from the reign of terror imposed by national socialists."

Bush and Merkel discussed Iran at a meeting at the White House on Wednesday and stressed diplomacy and the need for countries to stay united in their goal of preventing Iran from having a nuclear weapon.

The West suspects Iran's nuclear program of being a cover for developing weapons, while Tehran says it is for peaceful power generation.

"America will continue to rally the world to confront these threats, we're making progress," Bush said.

"We will continue to press the Iranian government to comply" with UN Security Council resolutions," he said.