The European Union sought on Monday to encourage the formation of an internationally acceptable Palestinian government with the prospect of expanded emergency assistance and an eventual resumption of direct aid.
EU External Relations Commissioner Benita Ferrero-Waldner praised Saudi Arabia for encouraging Palestinian rivals Fatah and Hamas to sign an agreement last Thursday to form a united government.
"It seems that steps are now really being taken towards a national unity government," she told reporters.
"A national unity government with which the international community can engage is indeed the best way forward."
Ferrero-Waldner said the European Union had to study details of the proposed administration before determining future assistance, but added it would be possible to expand help under a temporary aid mechanism set up last year to bypass Hamas.
"There has to be a momentum that has to be kept up," she said. "When the political conditions allow, there will be a much wider range of options."
This month the Quartet of Middle East peace brokers called for a development of the so-called Temporary International Mechanism -- which channelled nearly 200 million euros ($259 million) of EU funds to Palestinians last year -- to assist governance programmes, institution building and the economy.
Ferrero-Waldner explicitly held out the prospect of a resumption of direct aid if a new administration reflected the principles of the Quartet by recognising Israel's right to exist, renouncing violence and respecting peace accords.
"When it becomes possible to reengage with a national unity government ... we could then hopefully resume support to the Palestinian Authority, ministers and ministries and agencies, from which we have had to distance ourselves in the last year," she said.
"It's too early to give any details on money," she said. "But ... it has to be a somewhat comprehensive programme to say this is what we can offer in order to support political momentum."
Ferrero-Waldner said she hoped moves to expand aid could be "rather quick" after a meeting of the Quartet -- the United States, Russia, the European Union and the United Nations -- to follow Feb. 19 talks between Israel, the Palestinians and the United States.
Despite the European Union's cautious optimism about the Saudi-brokered agreement, Israeli officials say it failed to meet Quartet conditions for ending the crippling sanctions imposed after Hamas came to power in March.
They warned on Monday that Israel was considering suspending contacts with the moderate Fatah President Mahmoud Abbas if it did not.