Israel is tightening the financial squeeze on the Islamic militant group Hamas, which won Palestinian parliamentary elections last month. Hamas has struck a deal to receive financing from Iran.

Ehud Olmert

Acting Prime Minister Ehud Olmert says Hamas is not a strategic threat to Israel. The statement was a signal that Israel will continue to put economic, but not military pressure on Hamas.

Mr. Olmert told the parliamentary Foreign Affairs and Defense Committee that with Hamas at the helm, the Palestinian Authority is "contaminated with terror."

Officials at the closed-door meeting quoted Mr. Olmert as saying that Israel will not transfer any more money to the Palestinian Authority. That amounts to about $50 million a month in tax revenues collected by Israel on behalf of the Palestinians.

The United States and Europe are also threatening to cut nearly a billion dollars a year in aid to the Palestinian Authority, on grounds that Hamas is a terrorist organization seeking the destruction of Israel.

Secretary of Iran's Supreme National Security Council, Ali Larijani, right, greets Khaled Mashaal, exiled political leader of Hamas in Tehran

But Hamas has found a new donor. Iran pledged to support the Palestinian Authority, following meetings in Tehran with Hamas leader Khaled Mashaal.

Israelis spokesman Avi Pazner says Iran is seeking nuclear weapons, and therefore he says, its alliance with Hamas is an "axis of evil."

"With Iran now you have both the danger of classical terrorism, of nuclear terrorism, and a state who by itself has a terroristic policy. And this is a new threat, and this is a threat that is dangerous to everybody," he said.

Despite its strengthening ties with Iran, Hamas is also reaching out to Palestinian moderates. It held a first round of talks with the defeated Fatah party to discuss a possible partnership in the new Palestinian government.

Hamas wants an alliance with Fatah, which signed previous peace agreements with Israel. That could help a Hamas-led government win international recognition.