The European Union on Friday threatened to cut off aid to a Hamas-led Palestinian government "unless it seeks peace by peaceful means" - its strongest signal yet to the new leadership.

The EU foreign ministers, meeting in Salzburg, Austria, reviewed financial aid to Palestinians but announced no immediate halt to funds as long as Hamas has not formed a government.

Austria currently holds the EU six-month presidency.

“We want to remain a reliable partner for the Palestinian people, but we will not go soft on our principles,” EU external relations Commissioner Benita Ferrero-Waldner said following the two-day informal ministerial meeting.

"Money will not flow to the new (Palestinian) authority unless it seeks peace by peaceful means."

Wait and See

German Foreign Minister Frank-Walter Steinmeier said the EU wants to see the Hamas-led government’s platform to find out what it thinks of the ’roadmap’ to Middle East peace drafted by the United States, the EU, Russia and the United Nations.

After Hamas won legislative Palestinian elections last January, the EU has set three conditions for talks with a Hamas-led government: to recognize Israel, renounce violence and accept all previous agreements between the Palestinians and Israel.

If it does not do that, "there can be no cooperation," said Steinmeier, who added that the EU has so far not seen any "meaningful signals" from Hamas.

The decision to hold off on cutting aid was seen as a bid to pressure Hamas to shed its strident anti-Israel views and ensure EU aid continues to ease economic plight of the Palestinian people.

Last month, the EU granted 120 million euros in urgent aid for Palestinians before a Hamas-led government takes office. The aid was designed to avoid the collapse of the Palestinian Authority.

Israel has halted monthly transfers to the Palestinian Authority in tax receipts following Hamas’ election victory.

Livni stands strong

During a visit to several European capitals two weeks ago, Israel’s foreign minister Tzipi Livni said: “If they don’t accept our existence, they don’t have to accept our checks.”

“It’s not our policy to punish the Palestinians,” Livni said. “Israel would give humanitarian aid but if you give terrorist organisations money, it is the wrong direction and we then talk about our very life and future,” she added.

French Foreign Minister Philippe Douste-Blazy urged Hamas to take action on the demands, but said money must still make its way to the Palestinian people.

"We must avoid an economic suffocation of the Palestinian territories," Douste-Blazy said. "If we want to avoid social chaos, economic chaos and security chaos, it is in our interest to help the Palestinian population."

Hamas MP Mahmoud Zahar reacted angrily to the demand his group falls in line with the peace process.

"What are the peaceful means?" he asked. "Do they want us to respect Israel’s decision to kill and detain our children?"

He urged the EU to issue a response to Israeli actions against Palestinians. "They shouldn’t just talk about the Palestinians, but also about Israel," he said.

EU’s foreign policy chief Javier Solana presented the ministers with an update of current aid programs he co-wrote with Ferrero-Waldner. The paper offered no funding options nor a recommendation for an immediate cutoff of EU aid.

In 2005, EU governments and the EU executive commission together gave about 500 million euros to the Palestinian Authority.

Officials said half of that came from the European Commission, whose annual aid fluctuates.

EU aid for the Palestinian Authority includes funds to pay for salaries and administration costs.

According to diplomatic sources, Palestinian President Mahmoud Abbas will call on Europe not to cut financial aide to the Palestinian National Authority, during a European tour next week.

Abbas is expected to meet the Austrian EU presidency in Vienna on Tuesday and address the European Parliament in Strasbourg on Thursday.