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Political sources in Jerusalem said yesterday that Israel expects a certain amount of weakening in the international position on the new Palestinian Authority unity government, but said: "The story is money, and they won't get it for the time being."

"Since the Americans and Europeans are maintaining the freeze on aid, and Israel isn't releasing the withheld Palestinian taxes, Hamas hasn't gained anything," the sources added.

Israel hopes that the international community will continue boycotting the Palestinian government collectively, by withholding all economic aid.

"Overall, the diplomatic battle is being waged effectively," said the sources, praising Germany, which currently holds the European Union presidency, for its efforts in formulating the European position.

The sources dismissed Norway's decision to recognize the PA government and to offer it aid, saying that the amount of support will be inconsequential, and that Norway is conducting a foreign policy independent of the EU because it is not a member state.

The sources also expressed satisfaction with PA Chairman Mahmoud Abbas' decision not to appoint his senior associates as government ministers, thus allowing Israel to "maintain contacts with them."

The Bush administration informed Israel in advance of its intention to maintain contacts with Fatah ministers in the unity government - a decision that is primarily directed at Palestinian Finance Minister Salam Fayyad.

The United States has made it clear that while it will not resume provision of financial assistance to the PA, it has nonetheless decided not to cut ties with senior Fatah officials. U.S. officials said over the weekend that the American position on the PA government has not changed, and that the contacts with Fatah ministers should not be seen as a crack in the dam of the international boycott.

American spokesmen spent the weekend expressing their disappointment at the PA government's platform, saying that it clearly does not meet the Quartet's demands. Nonetheless, senior U.S. officials maintain that the situation in the PA would not dictate a complete severance of ties, and that continuing contacts with moderates is essential for keeping open lines of communication.

Secretary of State Condoleezza Rice will arrive in the Middle East next week next week for a visit that will include meetings with Abbas and other Palestinian officials.

Meanwhile, Israel's cabinet voted overwhelmingly yesterday to uphold the boycott of the new Palestinian government, with 19 ministers voting in favor and none against. Education Minister Yuli Tamir, and Minister of Culture, Science and Sport Ghaleb Majadele, both of Labor, abstained in the vote.

During the weekly cabinet meeting, Prime Minister Ehud Olmert said that "Israel expects the international community not to be misled by the formation of the Palestinian unity government, and to persist with its position of isolating the government that rejects the principles set out by the Quartet."

The prime minister added that the new government encumbers Israel's ability to conduct a dialogue with Abbas, because it includes problematic elements whom Israel cannot accept because they do not recognize its existence.

Olmert told the cabinet that during his recent meeting with Abbas he made it clear to the PA chairman that Israel would not recognize a Palestinian government that includes representatives of Hamas.

"Abbas told promised me that the new government would not be formed before the release of Gilad Shalit, but he didn't keep this promise," noted Olmert. "The rocket fire has continued on a daily basis and what has Abbas done about this?"

Defense Minister Amir Peretz called on the government to begin negotiations with Abbas on a final settlement, rather than waiting for the Palestinians to disarm their factions and dismantle the terrorist infrastructure, as required by the road map plan.

Peretz said that kicking off such a process would bring the political initiative back into Israel's hands, and would allow Israel to set an agenda ahead of the Arab League summit, which is set to take place in Riyadh, Saudi Arabia at the end of this month.

"On the one hand, we must not agree to letting the Palestinians ignore the Quartet's conditions - they must fight terror - but on the other hand, Israel must begin a political initiative rather than being on the political defensive," said Peretz. "The political freeze is working against it [the PA]. We must take the initiative into our own hands."

Foreign Minister Tzipi Livni said that "Abbas has imposed upon himself restrictions concerning the formation of the Palestinian unity government that will make it very difficult to advance a diplomatic process." She added that these restrictions would reduce Abbas' ability to approve significant diplomatic steps.