ARABS-ISRAEL - Feb 6 - Israel Will Co-operate With Palestinians.

Acting PM Ehud Olmert says Israel will continue to co-operate with the PA and its interim government as long as Hamas is not represented there. He said that Israel will also deal diplomatically with the Palestinian Pres, Mahmoud Abbas, known as Abu Mazen, whose position is not directly affected by the sweeping victory of Hamas in the Palestinian legislative elections. "I have no interest in harming PA chairman Abu Mazen as long as he doesn't cooperate with Hamas and as long as the Palestinian government isn't led by Hamas", Olmert said at an Israeli-European economic conference in Tel Aviv. "As long as it doesn't contain a Hamas government, we will speak and cooperate" with the PA "with caution and responsibility - with the intention of strengthening those who acknowledge the right of Israel to live without terror and within safe borders", Olmert said. Abbas is from the Fatah faction that still dominates the PLO, the legal signatory of all treaties and agreements with Israel, of which he is also the chairman. As Pres, Abbas has responsibility, under the Palestinian basic law, for the security services as "commander in chief". But when Yasser Arafat was alive, the US pressed for the creation of a new post of PM and a cabinet, approved by the legislature, where the PM- then Abbas - is chairman of the national security council and the interior minister is also in charge of the various Palestinian security forces. The election of Hamas, which will control the prime minister's office and the government, has made these new arrangements awkward for the US and Abbas, who has said he would try to regain full control over the Palestinian security forces and their budget. Israel and the West, which were taken aback by the Hamas victory, are looking to Abbas as if he, whom they criticised for weakness when Fatah controlled the government, has somehow become stronger after Fatah's defeat by Hamas. "We're into a period of strategic ambiguity", said an Israeli with knowledge of the Western debate. "Everyone is trying to get past the Israeli elections" on March 28. Olmert spoke one day after his government decided to transfer about $54m in tax and customs revenues, collected by Israel but owed to the Palestinians, to the PA. But he warned that a new decision on the transfer would be made each month and that the money would not be given to a government containing Hamas figures. Israel was under considerable pressure from the US to release the money so the Palestinians can pay 140,000 employees, including about 58,000 members of the security services. The payment was sharply criticised by the Likud party as a gift to Hamas. Gideon Saar of Likud said that Olmert's decision to pay the money represents "a policy of denial" of the Hamas victory. The US is trying to postpone the day that Hamas takes control until after the Israeli election, so that international funding can continue to flow to pay salaries. James Wolfensohn, the representative of the so-called quartet - the US, the EU, Russia and the UN - is about to make a trip through the Arab Gulf states to try to raise up to $300m in new money for the PA. The Palestinians, meanwhile, were dealing with the embarrassing fallout of a major corruption scandal among Fatah leaders of the PA that Abbas ordered kept quiet until the Palestinian elections were over. The Palestinian attorney general, Ahmad al-Meghani, revealed a scandal on Feb 5 that could involve billions of dollars of stolen public funds. He said he had made 25 arrests and issued warrants for others, and the Palestinian and Israeli press on Feb 6 was full of speculation about top officials who have fled the territories since Hamas won on Jan. 25. Separately, the Peace Now lobbying group said that the number of Israeli settlers living in the occupied West Bank increased in 2005 by about 7,000, bringing the total to 250,000 settlers. The increase came in the face of the withdrawal of about 9,000 settlers from the Gaza Strip and northern West Bank last summer. The settler population is increasing by 5.5% a year, Peace Now said, compared with a 1.8% growth rate for the overall Israeli population. No new West Bank settlement outposts were established in 2005; there have been 52 illegal outposts established since March 2001, when Ariel Sharon became prime minister. Before his stroke, he had promised to get rid of them, though the government says that only 24 outposts remain that were constructed after March 2001.