Three weeks after deciding to block the transfer of tax revenue to the Palestinian Authority, the Israeli cabinet decided on Wednesday to "unfreeze" the funds.

Israel halted the transfer some $100 million in customs duties it charges on behalf of the PA following the decision of Unesco to recognise the Palestinians as a member-state.

The move was heavily criticised by both the international community and Israel's security establishment. Senior IDF officers argued that withholding the funds could hamper co-ordination with the Palestinian security forces which are fighting Hamas terror networks and other rival Palestinian groups.

Foreign Minister Avigdor Lieberman objected to the decision, saying that Palestinian President Mahmoud Abbas uses the funds for "flats and benefits for murderers" and that the PA "is still acting against Israel in the international arena". But Mr Lieberman said that despite his opposition to the transfer of funds, his party, Yisrael Beiteinu, would not leave the coalition over this issue.

Meanwhile, a second unity agreement between Fatah and Hamas signed in Cairo last week appeared to guarantee Palestinian elections next year and establish a joint government.

However, sources on both sides of the Palestinian divide said this week that there was still no agreement on the identity of a new prime minister.

Senior Hamas leader Mahmoud a-Zahar said that Mr Abbas would probably not implement the unity agreement because of "US and Israeli pressure".