Olmert also said Israel would continue transferring monthly tax payments to the Palestinian Authority as long as Hamas was not in control. Hamas won parliamentary elections earlier this month, but has not yet begun forming a government.

"We have decided to transfer the funds to the Palestinians as long as they are not led by a government formed by Hamas and as long as they decide to work towards stability," Olmert said in a speech in Israel's commercial capital Tel Aviv.

"I have no interest in harming Palestinian Authority 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 Monday. Abbas is widely known as Abu Mazen.

He spoke a day after Israel agreed Sunday to transfer $54 million in desperately needed tax money to the Palestinian Authority, but said it might freeze payments after the Islamic Hamas group forms the next Palestinian government.

Israel's monthly transfer of the taxes and customs duties it collects on behalf of the Palestinians is crucial to the functioning of the Palestinian Authority. Halting the payments would deepen the government's financial crisis and add to the growing international pressure on Hamas to renounce violence and recognise Israel before it takes power.

Olmert had initially justified the freeze on the grounds that he wanted to ensure the money does not get in the hands of "terrorists", a reference to Hamas, which won a January 25 general election.