Fresh from its startling electoral success in Palestinian parliamentary elections, the militant Islamic group Hamas is courting its defeated rival, the mainstream Fatah movement, in an attempt bid to form a coalition government.
However, Fatah has so far rejected a cabinet role and its leader, President Mahmoud Abbas, yesterday appeared to rebuff Hamas's overtures, saying he would ask the Islamists to form a new administration.
Hamas's elation at its surprise electoral triumph over the once-monolithic Fatah in Wednesday's parliamentary polls quickly soured amid suggestions that international donors might cut millions of euros of aid to the Palestinian Authority if Hamas did not moderate its hardline positions.
The radical Islamic group behind some 60 suicide bombings in Israel since the start of a Palestinian uprising five years ago, is under intense pressure to renounce violence, disarm and amend its charter calling for the destruction of the Jewish state.
Acting Israeli foreign minister Tzipi Livni yesterday appealed to the international community not to legitimise a Palestinian government led by Hamas, saying the elections were not a "whitewash" for terrorist groups.
With Israeli voters due to elect a new government next March, some analysts predict that Hamas's victory will increase support for more unilateral moves outside the framework of peace talks, such as Israel's pull-out from Gaza last summer.
"At a minimum, there will be a radical reduction in contacts and this will affect the Israeli political scene by pushing people away from the notion that we have a partner to negotiate with - and closer to unilateralism or an even harder right-wing position," said Israeli analyst Yossi Alpher, a former director of the Jaffee Center for Strategic Studies in Tel Aviv.
However, opinion polls in Israel's Yedioth Ahronoth newspaper yesterday showed 48 per cent of Israelis favoured talking to a Hamas-led Palestinian government, with 43 per cent opposed.
While Hamas has insisted on its right to resist Israeli occupation, the movement has displayed a pragmatic side by honouring an unofficial ceasefire agreed last February.
Some experts say the group's victory will force it to curb its extremism, but others fear it will embolden Hamas to reshape Palestinian life with its strict interpretation of Islam.
The bankrupt Palestinian Authority - the quasi-government of the West Bank and Gaza - is dependent on foreign aid for survival, but funders are unwilling to give money to a government dominated by a movement listed by the US and EU as a terrorist group.
The European Commission, which offered €280 million to the Palestinian people last year, said yesterday it was in a dilemma about funding.
Former US president Jimmy Carter, who met Mr Abbas yesterday, said the US would be obliged to cut off funds to a Hamas-controlled authority, although other indirect funding through the UN and other agencies should prevent "chaos".
Hamas leader Ismail Haniyeh said yesterday he had asked Mr Abbas to meet in Gaza to discuss forming a new government. Mr Abbas's office said no appointment has been made yet.
Fatah leaders, still reeling from the movement's defeat at the hands of an electorate exasperated by its perceived corruption and inefficiency, decided late on Thursday not to enter a joint government with Hamas.
Having won 76 out of the 132 seats in parliament compared to Fatah's 43, Hamas does not need a partner to form a government. But Fatah could help Hamas by serving as a conduit for talks with Israel and presenting an acceptable face to the international community, as well as providing much needed know-how to the Islamic group.
Mr Abbas had earlier said he remained committed to peace talks and suggested they be conducted through the Palestine Liberation Organisation (an umbrella group which he also heads), instead of a Hamas-led Palestinian Authority.
Mr Abbas also faces continued calls from Fatah activists for his resignation, with hundreds of protesters demonstrating outside his house in Gaza City yesterday.
Hamas and Fatah gunmen also exchanged fire near the southern Gaza city of Khan Younis, the first armed clash since Wednesday's electoral upset.
Meanwhile, at the World Economic Forum in Davos, in Switzerland, Israel threw into doubt its willingness to continue the transfer of customs revenue to an aid-dependent Palestinian Authority.
"We will face practical problems of how you deal with people that call for the destruction of Israel," said Joseph Bachar, director general of the Israeli finance ministry.
Palestinian economy minister Mazen Sinokrot, sitting on the same panel as Mr Bachar, said the Israeli transfers amounted to monthly revenues exceeding $40 to $50 million, money needed to help pay salaries for 135,000 government employees.