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Vice Premier Shimon Peres suggested Israel might accept talks with a Palestinian government that includes Hamas as long as the militant group abandoned terrorism.
Speaking Friday in Davos, where he was attending the World Economic Forum, Peres told The Associated Press that Israel would not talk to the group "if Hamas will not change the policy" - a reference to its use of violence and commitment to the destruction of Israel.
"Until now Hamas didn't change the policy," he said, adding: "they don't want to engage in talks, you can't force them."
In comments to the British Broadcasting Corporation, Peres elaborated that Israel would "have to see where they (Hamas) are going - back to the road of violence and terror, or ahead to the route of peace.
"They didn't take yet a decision. They weren't prepared for this victory," he continued.
On Thursday, a day after Hamas' resounding victory, acting Foreign Minister Tzipi Livni appealed to the international community not to legitimize a Palestinian government led by Hamas, saying elections were not a "whitewash" for terrorist groups.
Acting Prime Minister Ehud Olmert effectively muzzled his ministers and government spokesmen that day as the government grappled with how best to deal with a brand new reality: "Hamastan," following the Hamas victory in the Palestinian elections.
Consultations were held throughout the day in both the Foreign and Defense ministries, and Olmert convened a meeting of the security cabinet in the evening. In addition, senior diplomatic officials were in close contact with the White House and State Department to coordinate moves over the next few days.
While Israel's long-term policy toward the new reality was still being formulated, one senior diplomatic source said that in the short term, Israel's policy would be to speed up the construction of the security fence, continue strikes against terrorist targets and mobilize international pressure on Hamas to change its ways or suffer the economic consequences.
One official said that Israel was in no rush to "shoot from the hip," and wanted to carefully explore the various options. He said Israel also wanted to wait to respond until it saw how the international community weighed in.
The country's response, diplomatic officials said, would also be dependent on the final make-up of the Palestinian Authority government.
Livni met in the afternoon with EU special envoy Marc Otte, and Olmert met in the early evening with Quartet representative James Wolfensohn in advance of a key meting of the Quartet in London on Monday.
Livni told Otte that after the Hamas victory, the EU must make it clear that Europe would not look understandingly upon a process that would lead to the establishment of a "terrorist government." The EU's foreign ministers are also scheduled to meet on Monday.
Livni also talked during the day with US Secretary of State Condoleezza Rice, and US Ambassador Richard Jones was in Jerusalem holding talks throughout the day.
One diplomatic official said that the Quartet would likely issue a statement Monday in the same sprit of Rice's initial comments on the elections. "You cannot have one foot in politics and another in terror," she said. "Our position on Hamas has therefore not changed."
"Anyone who wants to govern the Palestinian people and do so with the support of the international community has got to be committed to a two-state solution," Rice said. "You can't have a peace process if you're not committed to the right of your partner to exist."
EU foreign policy chief Javier Solana hinted that the elections could fundamentally change Europe's relationship with the PA. The results, he said, "may confront us with an entirely new situation which will need to be analyzed." Solana said in December that a Hamas victory could jeopardize EU financial support to the PA.
Although little information leaked out of the evening's security cabinet meeting, diplomatic officials said that Prime Minister Ariel Sharon's top adviser Dov Weisglass and Giora Eiland, the head of the National Security Council, were at loggerheads over Israel's policy toward the elections.
According to these officials, Eiland said that Israel should never have allowed Hamas to take part in the elections and blamed Weisglass for championing a policy that let it participate because he did not want a confrontation with the US, which was in favor of Hamas participation.
The officials said that Weisglass' argument was that Israel should not go to battle with the US over this issue before the vote, because whatever the results, it would need US support afterward.
Channel 2 reported that this disagreement was part of a larger dispute between the two, with Eiland interested in becoming the head of Olmert's foreign policy team, something that would effectively shunt Weisglass aside.
Rice and Solana, meanwhile, will be joined Monday by Russian Foreign Minister Sergey Lavrov and UN Secretary-General Kofi Annan in the Quartet meeting which is expected to set the tone of how the international community will react to the PA developments.
One diplomatic official said that Israel faces a real dilemma, because although on the one hand its reflex was to push for the world to cut off aid to the PA; on the other hand, if it does, and the PA collapses, Israel would once against bear responsibility for the fate of millions of Palestinians.
"If the PA dissolves and can't pay salaries, then suddenly everything again is on Israel's doorstep," he said.
In the immediate future, Israel must decide whether it will continue to transfer customs revenue to the PA under terms of the interim agreement signed in 1995, an agreement that Hamas does not recognize. The government currently transfers about $60 million a month.
In addition to this revenue, outside sources - such as the EU and US - contribute another $60 million to the PA, which keeps it solvent.
"Israel has to think hard about the alternatives," one diplomatic official said. "Israel has always said the PA must crack down on the terrorist organizations. Now that's over. But if the West stops funding the PA, the Iranians may step in and fill the gap. The situation is complex."
Last month, after the EU did not transfer funds because the PA did not live up to certain benchmark requirements, the PA turned to the Saudis, who paid the salaries.
Meanwhile, Shimon Peres met Thursday in Amman with King Abdullah II and told him that a new situation had been created in the region. Peres said that Hamas must now decide if it would remain a terrorist organization and as a result isolate itself from the rest of the world, or abandon terrorism and manage Palestinian affairs on the basis of compromise.