By Ingrid Melander and David Brunnstrom
LUXEMBOURG, June 18 (Reuters) - The European Union wants to resume direct aid to the Palestinians to bolster President Mahmoud Abbas's emergency cabinet but is still looking at when it can release funds, EU officials said on Monday.
"There will be part of the money that will be direct," EU foreign policy chief Javier Solana said when asked if the EU would end an aid embargo imposed when militant Islamist group Hamas came to power in March 2006.
Hamas seized control of the Gaza Strip after routing forces loyal to Abbas last week, prompting him to replace the Hamas-led Palestinian unity government with an emergency cabinet. Hamas rejected the appointment of the new government as a "coup".
"There is no doubt that part of the money will go into the account of Prime Minister (Salam) Fayyad," Solana said of the U.S.-trained economist Abbas named as prime minister and with whom the EU had already resumed contacts as finance minister.
"There is going to be a direct relation with his government," he said, giving no timeframe for a decision.
EU External Relations Commissioner Benita Ferrero-Waldner, the official charged with overseeing direct financial assistance to the Palestinian Authority, said she wanted to meet as soon as possible with Fayyad.
"I think it's for him to tell us what is most needed and (what) are the conditions in place," she said, adding there were also issues of "financial control and transparency" to clarify.
"The most important is first to have humanitarian aid," she said. The EU would also appeal to Israeli Foreign Minister Tzipi Livni in talks later on Monday to release some $800 million Palestinian tax revenues held by her government.
"MOMENT OF TRUTH"
Livni told reporters the creation of the new government sent a message of hope and Israel was willing to work with those who accepted Israel's right to exist.
"This type of government we will work with and of course release the money. But these are only the first decisions and we will have to see what is the situation on the ground," she said.
"This is a moment of truth for Palestinian society."
The collapse of Abbas's unity government with Hamas has prompted Israeli Prime Minister Ehud Olmert to say Israel would release frozen tax revenues and led the Bush administration to declare it will to lift a ban on direct aid this week.
Western powers imposed the aid embargo because Hamas, which won parliamentary elections last year, failed to recognise Israel, renounce violence and accept interim peace deals. Hamas secured alternative support from Israel's arch-foe Iran.
When the EU suspended direct aid, nearly half a total annual 500 million euros of transfers were flowing through national and local authorities, while much of the rest required government involvement. Despite the embargo, it says it has increased humanitarian aid to the most needy Palestinians.
Diplomats said EU foreign ministers would take no definitive decision to end the direct aid embargo in Luxembourg, and instead signal they would study "further practical and financial support" for Abbas.
While Washington wants to isolate Hamas economically, diplomatically and militarily in the Gaza Strip, some European diplomats have expressed misgivings.
"The international community does not want two Palestinian states, otherwise it will be impossible to find a solution," said Luxembourg Foreign Minister Jean Asselborn.
(Additional reporting by Mark John)
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