Israel said Monday it will consider releasing millions of dollars in froozen tax revenues to the Palestinian Authority and freeing Palestinian prisoners if the government moderates its hard-line views. Palestinian President Mahmoud Abbas has been trying to persuade the ruling Hamas movement to moderate its views through the formation of a national unity government. Talks have stalled in recent days, with the US signaling it would not deal with a Hamas-Fatah coalition unless it states clearly that it recognizes Israel, renounces violence and accepts existing peace agreements.

If Hamas softens its position and an Israeli soldier captured in June by Hamas-allied militants is released, Israel would transfer millions of dollars in taxes frozen after Hamas came to power and release prisoners, said Israeli Foreign Minister Foreign Ministry spokesman Mark Regev.

Israel is hopeful that Foreign Minister Tzipi Livni will hear at a meeting with Abbas in New York Monday that Hamas is willing to moderate its views.

"For us the meeting is important," Regev said. "We don't want to see stagnation."

In related developments, Egyptian President Hosni Mubarak said the number of Palestinian prisoners Israel is ready to release in exchange for the captured soldier is higher than expected, Cairo's official Middle East News Agency (MENA) said Monday.

"Egyptian contacts and efforts are progressing, and according to the outline of the agreement - which has not yet been finalized - the soldier will be freed in exchange for the release of a large number of Palestinian women and children," Mubarak was quoted as saying.

"Israel will then release Palestinian prisoners in three stages," MENA quoted him as saying, without specifying a number.

Israeli Corporal Gilad Shalit was captured on June 25 during an attack by Palestinian militants on a border post from which his tank unit had been shelling the Gaza Strip. His seizure was claimed by three groups, including the armed wing of Hamas.

Israeli media reports have estimated the number of Palestinians who could be released as part of a swap at between 600 and 800.

Egypt, together with Abbas, has been involved in diplomatic efforts to secure the release of the Israeli conscript, whose capture led to a military offensive against the Gaza Strip.

But Israeli officials warned against hopes of an imminent release and stressed that no agreement had yet been reached.

Palestinian Prime Minister Ismail Haniyya said Saturday that efforts to secure the release of the Israeli soldier were making progress. http://www.dailystar.com.lb Meanwhile, the prime minister's bodyguards fired into the air on Monday to clear a path through striking workers who mobbed his motorcade in another sign of deep divides on the road to a unity government.

The protest outside Parliament forced Haniyya to cancel a speech to the legislature on how his government was dealing with an economic crisis that has increased poverty in the West Bank and Gaza Strip.

The parliamentary session was suspended when members of Abbas's Fatah faction left the chamber to join the protesters, who chanted "Haniyya, where are the salaries?" and "Haniyya, go home."

A strike by government employees started on September 2.

Protesters jumped on top of Haniyya's car, and the prime minister's bodyguards and members of a Hamas-led police force responded by firing rifles into the air to force them back. One woman was slightly hurt.

An aid and banking embargo spearheaded by Washington has prevented the Hamas-led government from paying salaries to 165,000 workers since the Islamic militant group took power in March.

The workers' unions are dominated by Fatah. The strike has shut down hundreds of Palestinian public schools and health clinics. Haniyya brushed aside the protest as democracy gone too far.

In separate developments, an Israeli military court on Monday withheld a ruling on the release of Hamas legislators detained after the Israeli conscript was abducted in June.

Last week, the court ordered 21 lawmakers and ministers to be freed on bail but delayed their release to consider an appeal by the prosecution to keep them in detention.

A decision had been expected at a session on Monday, but the court, ordering the legislators and ministers to remain in custody, said it would make its ruling soon.

Jawad Boulos, a defense lawyer, told Reuters that a decision could be issued as soon as Thursday.

"They're keeping them as hostages until the release of Gilad Shalit," said Osama al-Saadi, a defense lawyer in the proceedings, referring to the abducted soldier.

The military prosecution has charged the 21 Hamas detainees with membership in a "terrorist group" and said that they posed a security threat to the Jewish state.

In the wake of Hamas' election victory, the world is threatening to cut funding to the Palestinian government. Both the United States and the European Union have said that they will stop giving aid to the Palestinian Authority if the ruling Hamas Party fails to renounce violence and recognize Israel. The Israeli government is vowing to withhold customs payments owed to the Palestinians if there is even the slightest chance that the money could be used to harm Israelis.

While this knee-jerk reaction to Hamas' victory in the Palestinian elections is predictable and to some extent understandable, its consequences are likely to be disastrous. The Palestinian Authority uses foreign aid, which totals $900 million per year, to pay government salaries, provide necessary services and finance vital infrastructure. Cutting off aid would likely bankrupt the Palestinian Authority, which is already in the midst of a severe financial crisis. This would only exacerbate the Palestinians' poverty and sense of desperation, which are underlying causes of militancy and extremism, and would likely see the Occupied Territories plunge further into chaos. And while cutting off funding to the PA won't kill Hamas, which has separate funding from other sources, it will kill the Palestinian government, which ironically, Israel and the West have called upon to act as a bulwark against extremists.

Since assuming office, President Mahmoud Abbas has tried to clamp down on militants. But in an interview with Al-Arabiyya television on the eve of the elections, Abbas said that even when he tried crack down on extremists, Israel continued to violate the cease-fire and ignore its obligations under the "road map" to peace. Israel's occupation policies would only infuriate Palestinian militants and weaken his government. And a weakened Palestinian government has given rise to the kind of lawlessness and chaos that we have seen in Gaza in recent years.

Clearly, a weak and ineffective Palestinian government is not in anyone's interest. Rather than perusing a policy that would further undermine the PA, a better approach would be to give the Palestinians that which is long overdue: a Palestinian state with contiguous borders and East Jerusalem as its capital. There is no question that Hamas needs to renounce violence and recognize Israel's right to exist. But Israel must also be called upon to reciprocate toward the Palestinians. Just as the international community has applied pressure on Hamas to renounce violence, the world ought to encourage Israel to end settlement construction, occupation, raids and assassinations.

While the international community may not like the outcome of the elections, Hams has become the legitimate democratic representation of the Palestinian people. Israel, the U.S. and Europe have no choice but to engage this democratically elected government and empower it to improve the lives of its citizens.

Hamas on Monday sought to reassure investors in the Palestinian economy that their stocks would be safe under the Muslim fundamentalist group after it shot to power in last week's general election.

The Al-Quds index of the Palestinian stock exchange, based in the West Bank town of Nablus, has fallen 4.69 percent since Hamas's shock victory on Wednesday with many share offers failing to find buyers.

"After noting the sharp drop in Palestinian financial markets since Thursday, we want to reassure investors that Hamas considers the [stock exchange] an essential pillar of our national economy," said a statement.

"Hamas realizes that tens of thousands of Palestinian families have invested in this market and we assure them that the movement's economic policy will stimulate and develop this market."

Stock exchange director Hassan Yassin meanwhile insisted the Palestinian financial market was stable and denied rumors the stock exchange would be closed following the Hamas victory, Palestinian newspapers reported.

The main companies on the stock exchange published an advert in Monday's press seeking also to dispel such fears, saying they were confident about the future of the Palestinian economy.

Assurances came on the heels of threats from the international community to cut aid to the Palestinian Authority (PA) should Hamas take power.

The United States and European Union, the Palestinians' main donors who each have Hamas on their blacklist of terrorist organizations, have both been placed in a bind by Hamas's landslide victory in last week's general election.

President George W. Bush said on Friday that Washington, which handed over $363 million last year, would cut its subsidies if Hamas does not renounce the use of violence and annul its founding charter's objective of destroying the Jewish state.

The EU, which gave $1.5 billion during the last five years, has also warned that it will only continue its support of the Palestinian economy on condition that the incoming government is in favor of peace with Israel.

The most pressing item on the Palestinian economic agenda is to find the cash to pay the January salaries of some 130,000 government employees.

Even before the Hamas victory the PA was struggling to find the funds to meet its wagebill.

At the end of last year, the European Union froze plans to pay the PA 35 million euros at the request of the World Bank.

The move came after the government allowed the budget deficit to soar to a record $900 million with a pre-election pledge to increase public sector salaries.

"The Palestinians need around $100 million to pay the government employees which form the backbone of the regime, but nobody knows where they are going to find the money," said a European diplomat posted in the Palestinian territories.

Nasser Abdel-Karim, a Palestinian economic analyst, acknowledged that the Palestinians could not afford to "turn our backs on the international financial support otherwise the PA will be in deep financial trouble.

"The Palestinian economy is incapable of coping by itself despite the reforms we have carried out," Abdel-Karim told the Voice of Palestine radio station.

The situation is likely to be further complicated by threats from Israel that they will screen customs revenues that are owed to the Palestinians to ensure that they do not get into the hands of "terrorists."

Israel currently pays back around $50 million every month to the PA as a reimbursement for customs duties levied on goods destined for Palestinian markets that transit through Israeli ports.

Acting Prime Minister Ehud Olmert vowed late Sunday that Israel would never transfer any funds to the PA if there was even the slightest chance they could be used for harming Israelis.

"We are not ready in any way to allow a situation in which money transferred by the government of Israel will somehow end up in the control of murderous elements who want to harm Israeli citizens," Olmert said at a joint news conference with visiting German Chancellor Angela Merkel. -Agencies

Thousands of activists from Fatah protested throughout the Gaza Strip on Friday, burning abandoned cars, shooting in the air and demanding Fatah leaders resign after the party's shock election defeat.

With Hamas winning a strong majority in the parliamentary elections this week, Abbas said he will ask the Islamic group to form the next Palestinian government, but Fatah rejected a role in the new Cabinet and Israel ruled out peace talks in what could be the first steps to isolate the militant group after its election victory.

About 1,000 angry party activists, including 100 gunmen, drove by Palestinian leader Mahmoud Abbas' resident in Gaza, calling from loudspeakers for all corrupt leaders to step down and urging Abbas not to form a coalition with Hamas. Abbas was in the West Bank town of Ramallah at the time.

After evening prayers, the protesters went back to Abbas' house, and fired rifles in the air, before marching and driving through the city, waving Palestinian flags, yellow Fatah flags and posters of the late leader Yasser Arafat.

They then led a march through Gaza City toward the security headquarters, tearing down Hamas election posters and banners and burning tires and some of the Hamas posters. Security personnel did not allow anyone to enter their compound.

The demonstrations did not turn violent. However, earlier in the day an argument between about 20 Hamas and Fatah loyalists in the Gaza town of Khan Younis degenerated into gunfire and rock throwing that left three people injured.

One man was treated for moderate gunshot wounds and two for minor injuries caused by rocks, according to witnesses and hospital officials.

More than 15,000 people took part in the mass Fatah demonstrations across Gaza.

Mohammad Dahlan, Fatah's strongman in Gaza, arrived at the house and called on the crowd to head back to Parliament where he gave a short speech.

"I assure you that Fatah won't participate with the new government... Those who are betraying us should assume this responsibility," he said.

In the West Bank city of Hebron, about 500 Fatah members, including some gunmen shooting in the air, marched to the local Fatah office, where one of the masked gunmen read a statement demanding the resignation of the central committee.

The militant Al-Aqsa Martyrs Brigades, part of Fatah, issued a statement threatening to "liquidate" the faction's leaders if they changed their minds and joined a Hamas-led administration. http://www.dailystar.com.lb

Acknowledging Hamas' new standing as a political powerhouse, Abbas told reporters: "We are consulting and in contact with all the Palestinian groups and definitely, at the appropriate time, the biggest party will form the Cabinet."

Hamas leader Ismail Haniyya said he had asked Abbas to meet Sunday to discuss forming the new government. Abbas' office said no appointment has been made yet.

But acting Israeli Foreign Minister Tzipi Livni appealed to the international community not to legitimize a Palestinian government led by Hamas, saying elections are not a "whitewash" for terrorist groups.

Speaking to reporters, Livni said Israel's withdrawal from the Gaza Strip last summer opened a window of opportunity in peace efforts between Israel and the Palestinians. With the election of Hamas, she said, "the Palestinians slammed it shut."

The overwhelming victory for the Islamist movement in Wednesday's parliamentary elections has thrown prospects for Middle East peacemaking into turmoil and triggered alarm in Israel and across the world.

Despite Hamas' victory, Abbas said he remained committed to reaching peace with Israel through negotiations.

"I am determined to implement the program on which I was elected," Abbas said in a televised address. "It is a program which is based on negotiations as a way to reach a peaceful resolution to the conflict with Israel."

But exiled Hamas leader Khaled Meshaal said in Damascus that the so-called "road map" for peace was "unacceptable," telling the Italian daily La Repubblica that the U.S.-backed plan " imposes detailed conditions on us to disarm ... But with respect to Israel, it's vague."

But Meshaal said Hamas would "certainly not" lay down its arms as long as much as its territory was occupied.

Echoing Meshaal's position, Moussa Abu Marzouk, Hamas' deputy head, pledged to continue resistance against Israeli occupation and stressed that the group would not yet recognize the Jewish state.

But in a separate Reuters interview he said the movement had a "clear vision for a government of unity - one in which everyone joins."