The Islamic militant group Hamas, which assumed control of the Palestinian Authority last week, says it will not cave in to U.S. and European sanctions. Hamas is also facing mounting military pressure from Israel.
Palestinian Prime Minister Ismail Haniyeh says Hamas will not change its policies, despite what he described as U.S. and European "blackmail." Haniyeh was referring to announcements Friday by the U.S. and European Union that they are cutting off nearly $1 billion in annual aid to the Palestinian Authority.
Hamas is broke, but it continues to reject international demands to renounce violence and recognize Israel. Mr. Haniyeh said the U.S. and Europe are trying to "strangle" his government, but they would not extract political concessions.
That defiance has left the new government in a bind. It does not have the money to pay the March salaries of 140,000 government employees, which are already a week overdue.
Palestinian analyst Wadia Abu Nasser says the economic crisis is affecting the mood on the Palestinian street.
"From my own observation, I can tell you that there is some concern by many Palestinians about their daily living, their daily income, and people quite afraid from the chances of some humanitarian catastrophe," said Wadia Abu Nasser.
Israel has also cut off $50 million monthly tax payments to the Palestinian Authority. But Israeli Spokesman Mark Regev says Israel, the U.S. and Europe want to prevent a humanitarian crisis.
"If we're going to be turning off the money for the official Palestinian treasury, now controlled by Hamas, at the same time, we have to energize the humanitarian projects and the funding for those projects," he said.
On Friday, the United States said it would end direct assistance to the Palestinian Authority, but increase humanitarian aid to Palestinians through the United Nations and other agencies.
In addition to the economic squeeze, Israel is also stepping up military pressure on Hamas. Israeli aircraft fired missiles into a car carrying Palestinian militants in Gaza, killing five of them and a seven-year-old boy. The strike targeted a training camp of the Popular Resistance Committees, a militant group with close ties to Hamas.
Later, two militants from the al-Aqsa Martyrs' Brigades were killed in an Israeli air strike, after they fired rockets from Gaza into Israel.