JERUSALEM - Israel handed over 100 million dollars in frozen funds to the cash-strapped Palestinian Authority on Friday in an effort to bolster president Mahmud Abbas,

locked in a battle for power with the democratically elected Hamas government.

The move came as the European Union's foreign policy chief, Javier Solana, was set to meet Abbas as part of a Middle East tour aimed at reviving the Israeli-Palestinian peace process.

Since Hamas took over the government in March, Israel has withheld hundreds of millions of dollars in customs duties collected on behalf of the Palestinians, plunging the territories into severe economic crisis.

"This morning we transferred 100 million dollars to an account of the Palestinian presidency," said a senior official in Prime Minister Ehud Olmert's office.

He said the money, which was promised by Olmert during a summit with the Palestinian leader last month, would go towards "humanitarian purposes and strengthening Palestinian president Mahmud Abbas's presidential guard as agreed upon by both sides."

Commenting on the transfer, Palestinian negotiator Saeb Erakat said: "I would like to underline that this was Palestinian money Israel was holding. The money Israel freezes every month represents 60 percent of the income of the Palestinian Authority."

The money is part of more than 600 million dollars Israel has collected withheld since Hamas took office after winning a landslide election victory over Abbas's Fatah party in January.

The United States and the European Union have cut off aid to the Palestinians because Hamas refuses to renounce violence (when attempting to liberate their country from Israeli occupation) and recognise Israel.

Since then, tens of thousands of state employees have had only a fraction of their wages paid and international organisations have warned of an imminent collapse of the shattered Palestinian economy.

However, the Israeli official insisted the 100 million dollars would not go towards paying salaries.

The long-awaited meeting between Olmert and Abbas on December 23 -- their first since an informal meeting in Jordan last June -- sparked hope of a revival of the peace process that has been moribund for six years.

Immediately after the December summit, Israel released 50 million shekels (12 million dollars) in frozen custom funds which went towards paying hospital workers and buying medical equipment.

Both sides had agreed to form a joint mechanism to decide where the remaining funds would be funnelled, he said.

The United States, which has been trying to boost Abbas in his power struggle with Hamas, has argued in favour of releasing the frozen tax funds.

"We'd certainly like to see that transfer happen as soon as possible, obviously to be done in a way in which the benefits of those funds flow to the Palestinian people and certainly don't do anything to support the Hamas-led government," said State Department deputy spokesman Tom Case.

"We're confident that the Israelis and Palestinians will be able to work out those arrangements."

Fatah and Hamas have been trying in vain for months to agree to form a government of national unity, in hopes of ending the boycott and presenting a united front toward the Israelis.

Clashes erupted after Abbas called for early elections as a way to resolve the standoff with Hamas, which rejected the move.

Abbas is set to travel to Syria on Saturday for talks with President Bashar al-Assad and leaders of Palestinian militant groups based there.

There has been a flurry of speculation over whether he will meet with Khaled Meshaal, exiled leader of Hamas, and whether such a meeting might lead to an end to the differences between their two parties.

Solana's visit to the region is the second in a week by a representative of the Middle East diplomatic quartet, whose 2003 peace roadmap has made virtually no progress.

US Secretary of State Condoleezza Rice met Abbas as wells as Olmert and other officials in a bid to kickstart the peace process.

In London on Thursday, she said she hoped for more meetings with them by February 15.

Israel freezes building of new settlement

Israeli Defence Minister Amir Peretz has ordered a freeze on the building of a new settlement in the occupied West Bank, just weeks after approving the plan, his ministry said Friday.

"Defence Minister Amir Peretz has recently ordered the freezing of the construction of the settlement of Meskiot in order to examine the issue in depth," a spokeswoman said.

Israel has faced massive international criticism since Peretz approved on December 26 the construction of the settlement of Meskiot in the northern Jordan Valley to house former settlers from the Gaza Strip.

His decision had paved the way for what would have been the first new settlement in the occupied Palestinian territory in more than a decade.

The Yesha settler movement protested at the minister's change of heart.

"The defence minister is doing everything in order to hamper the rehabilitation of the Gush Katif people and their return to normal life," it said, referring to a former settlement bloc in the Gaza Strip.

"The construction was approved by former prime minister Ariel Sharon and the freezing stems from cynical political considerations," a statement said.

Israel pulled all settlers and troops from inside the Gaza Strip in 2005 after a 38-year occupation.