The EU move gave Hamas the possibility to think again about its policy directions, said German Foreign Minister Frank-Walter Steinmeier.

The EU’s decision on Monday to stop all direct aid to the Hamas-led Palestinian government follows weeks of internal hand-wringing on how to prevent total economic collapse in the West Bank and Gaza Strip without channelling aid through the militant Islamic group.

The EU aid freeze also represents a wake-up call, which EU ministers said could prompt Hamas leaders to rethink their hardline stance on Israel and the use of violence.

European governments were not seeking to punish Palestinians but to encourage Hamas to "adapt and transform to the realities of today," said EU foreign and security policy chief Javier Solana.

The EU move gave Hamas the possibility to think again about its policy directions, said German Foreign Minister Frank-Walter Steinmeier.

The EU decision to suspend aid was not taken lightly. For weeks EU foreign ministers had voiced hopes that election victory and government responsibilities would prompt a change in Hamas’ policies.

EU External Relations Commissioner Benita Ferrero-Waldner told reporters in March that the bloc was hoping for "positive change" and keeping its door open to Hamas — provided the militant group met certain key conditions, including recognition of Israel.

On Monday in Luxembourg, however, EU ministers voiced "grave concern" at the program of the new Palestinian government, saying it did not contain a clear commitment to the three principles laid out by the international community: non-violence, recognition of Israel’s right to exist and acceptance of existing agreements.

"There is no signal that Hamas is ready to change," said Germany’s Steinmeier.

As a result, ministers said all EU aid to the Palestinians was being reviewed. Pending such a reflection, direct assistance to the Palestinian government was being temporarily suspended.

Ministers tried to soften the impact of their aid suspension — which could affect up to 50 percent of an estimated 500 million euros (US$605.9 million) worth of EU funded programs in the Palestinian territories — by insisting that assistance to meet the "basic needs" of the Palestinian people would continue.

They also made another appeal for a change in Hamas policies and demanded that Israel’s new government desist from actions that violate international law and threaten the viability of the two-state solution.

EU governments were seeking to be as balanced as possible in tackling the dilemma posed by the Hamas victory in January’s Palestinian polls, EU diplomats told reporters.

But with the Hamas leadership sticking to its hardline stance — and given the EU’s decision to blacklist Hamas as a terrorist organization — Europe could not finance the new Palestinian government or have formal contacts with Hamas.

"Business as usual will not be possible," Solana told reporters on Monday. The EU would, however, follow the situation on the ground very closely and "adapt our response to that," Solana insisted.

"We are accountable to our electorate and our taxpayers," said Austrian Foreign Minister Ursula Plassnik, referring to concerns that EU money could be used for Hamas operations against Israel.

Plassnik insisted, however, that aid to meet the basic human needs of the population, including medical assistance and education would continue.

The EU had no no wish "to punish" the Palestinian people, said British Foreign Secretary Jack Straw.

Continuing their difficult diplomatic juggling, EU ministers said the aid cut-off was only temporary while they come up with alternative ways of channelling funds to the Palestinians.

Straw said donors were seeking "other routes for the provision of funds so that ordinary people on the Palestinian street are not disadvantaged."

Identifying other ways of channelling aid to the Palestinians may not be that easy, however.

International aid agencies like Oxfam have warned that they do not have the capacity to run health and education services in the Palestinian Territories.

"The Palestinian Authority is responsible for this and therefore donors must keep funding it," Oxfam said.

Diplomats said one option under consideration was to deal directly with Palestinian President Mahmoud Abbas, who is from the Fatah group, rather than with the Hamas-led Palestinian Authority.

But there was concern that this would undermine the office of Palestinian premier, which the international community had tried to reinforce when Yasser Arafat was president.

There were also suggestions that the EU could pay the salaries of Palestinian teachers and doctors to ensure there was no disruption in these key sectors.

EU diplomats also insisted that Arab nations must come to the aid of the Palestinians.

But Ferrero-Waldner admitted the bloc was still mulling over different options. "We will come up with ideas … we are not ready yet," she said.