Israel has said it is ready to work with the new Hamas-free Palestinian cabinet and may also unblock hundreds of millions of dollars in withheld tax funds. Israeli Prime Minister Ehud Olmert was speaking in New York: “We will de-freeze money that we kept under our control because we didn’t want this money to be taken by Hamas in order to be used as part of terrorist action.”

In New York, Olmert met UN chief Ban Ki-Moon to discuss the humanitarian crisis in the region. On Tuesday, he will hold talks with US President George W Bush to discuss strategy in light of recent developments. Some analysts believe one option would be to bolster relations with the new moderate cabinet in the West Bank and leave Gaza to the more radical Hamas.

Meanwhile, Kiryat Shmona, a town near Israel’s northern border, has been hit by fresh rocket attacks from neighbouring Lebanon, causing no casualties and little damage. Olmert says he suspects a small Palestinian group is behind the shelling.

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