The step comes as Palestinian President Mahmoud Abbas, from the Fatah movement, formed a new technocrat government that excludes any Hamas members, with Salam Fayed, a former finance minister, as prime minister.
Abbas made the change after Hamas took over institutions - particularly security bodies - associated with Fatah in the Gaza Strip last week. However, it is unclear to what extent the new PA government, based in the West Bank, will be able to function in Gaza.
"The USA [will] resume full assistance to the Palestinian government and normal government-to-government contacts," US Secretary of State Condoleezza Rice told a press conference in Washington on 18 June.
The sanctions, imposed after the Islamic Hamas movement's election victory early last year, put an end to direct aid to the PA and cut economic ties. In addition, Israel ceased the transfer of tax funds it collects for the PA under the interim accords from the 1990s.
Rice said the USA rejected the Hamas takeover in Gaza, but would "help ease the suffering" of people there by donating some US$40 million to UNRWA, the UN Agency for Palestinian Refugees.
A day earlier, UNRWA Commissioner General Karen Koning AbuZayd said her agency was facing a $200 million deficit for this year.
Furthermore, Tzipi Livni, Israel's foreign minister, said her government would eventually release the tax money, estimated at about $700 million, to Fayyed's government.
European Union assistance
The European Union announced that it "will resume normal relations with the Palestinian Authority immediately", including "direct financial support to the government" and "intensive efforts to build the institutions of the future Palestinian state".
"We can now channel our assistance according to priorities decided on with the [new Palestinian] government, which we now recognise, and this will enable us to resume long-term development assistance and institution building," said Alix de Mauny, from the European Commission Technical Assistance Office in Jerusalem, which continued to provide humanitarian aid to beneficiaries over the last year through non-governmental agencies.
Some human rights groups, as well as the former Hamas-led government based in Gaza, have, however, termed the new West Bank-based Fayyed government "illegal", saying that Abbas violated the Palestinian Basic Law in its formation, setting a formidable challenge to its legitimacy.
Meanwhile, the World Food Programme (WFP), the International Committee of the Red Cross and the World Health Organization have succeeded in bringing the first aid shipments into Gaza since the start of last week's intense internecine violence.
Ten trucks of food and three trucks of medical aid were allowed in on 19 June through the Kerem Shalom Crossing in southern Gaza. On 18 June the gas supply was restored.
However, Karni, the main commercial crossing, remains shut and aid workers say that without it resuming normal operations, a severe crisis may hit the Gaza Strip.
Some perishable milk products and fruit are already not available in Gaza and prices of other basic food staples are rising in the severely impoverished area where 1.1 million people, out of a total of 1.4 million people, receive aid from UNRWA or WFP.