European Union foreign ministers on Saturday pledged to work with moderates in the Palestinian leadership, while the bloc's foreign policy chief said events in the region are for the first time in years raising hopes of full peace between Israel and the Arab world. European hopes for peace have been raised by the relaunching of a 2002 peace initiative at this week's Arab League summit in Riyadh, Saudi Arabia. Still, they have faced a dilemma over how to deal with the newly formed Palestinian unity government - a coalition between Hamas and the more moderate Fatah of Chairman Mahmoud Abbas. Its platform falls short of international demands that it recognize Israel, renounce violence and abide by existing Palestinian-Israel agreements. On Saturday, the Europeans agreed they will judge the new government by its actions rather than its words and progressively help it build up credible government institutions. However, the 27-member bloc will limit its dealings to moderates such as Abbas, Foreign Minister Ziad Abu Amr and Finance Minister Salam Fayyad, Solana said. "We don't see any reason why we should not continue to see someone who we have known for many, many years, who has been cooperating with us," EU foreign policy chief Javier Solana said. "I see no reason to cut contacts ... they're friends, we continue to cooperate with them." Palestinian Information Minister Mustafa Barghouti welcomed the step, but said he disagreed with the decision to "discriminate" among members of the Palestinian Cabinet. Willingness "to deal with the government is a positive step, even though discrimination between ministers is not accepted," he said. "We hope that this decision of dealing with certain ministers will change." Looking at the broader prospects for peace, Solana - who attended the Riyadh summit - praised Saudi Arabia for its leadership in reviving a 2002 Arab peace initiative. "The Arab League for the first time in many years has assumed the responsibility to be more active in the peace process," Solana said. "If you put that together with the reaction of Prime Minister Ehud Olmert, the two things ... are beginning to construct the dynamic that could lead to the settlement of a crisis that has been with us for many years." The Arab initiative calls for full recognition of Israel by the Arab world in return for an Israeli withdrawal from territories captured in the 1967 Six Day War and a "just solution" for Palestinian refugees who fled or were driven from homes inside Israel during the war following Israel's creation in 1948. "I think after the meeting in Riyadh (Arab nations) will be constructive and active in moving the peace process forward," Solana told reporters at the end of a meeting of EU foreign ministers. "The moment in which we are living is a moment of hope that we may be able to move the process of a comprehensive peace forward." In Israeli media interviews, Olmert has praised the Arab plan as a major breakthrough in Arab relations with the Jewish state, but has flatly rejected its call for the return of Palestinian refugees. The EU ministers agreed to keep in place, for now, an ad-hoc aid scheme, overseen by the World Bank, that in the past year has funneled hundreds of millions of euros directly to poor Palestinians - bypassing the previous Palestinian government led by Hamas. The emergence of that government a year ago led international aid to the Palestinian Authority to dry up. The EU cobbled together a so-called "Temporary International Mechanism" that hands out monthly cash payments to support 150,000 or so destitute Palestinian families. Despite an official freeze of aid to the Palestinian government, international assistance to the Palestinians has risen in the past year. The EU alone has given some â‚¬700 million (US$932.3 million) _- almost half of it in cash handouts to poor Palestinians and the remainder through the United Nations and other relief groups. That has left the Palestinian Treasury empty. Fayyad, the new finance minister, has said it will take him four to six months to rebuild the sound finances and budgeting practices that existed before Hamas took power.