Israel's acting prime minister says peace talks with Palestinians are still possible, even though the Palestinian government will be run by the Islamic militant group Hamas. The comments come as Palestinian President Mahmoud Abbas asks Hamas to form a new government.

Since the Islamic militant group Hamas won Palestinian parliamentary elections on January 25, Israeli officials have said they will have nothing to do with a Palestinian government run by Hamas. This week, Israel's cabinet voted to suspend the transfer of monthly tax and customs duties to the Palestinian Authority, raising fears that more than 100,000 Palestinian civil servants will not get paid next month and thereafter.

But Israeli officials have also stepped back from harsher punitive measures, such as stopping Palestinians from working in Israel, and stopping the shipment of Palestinian agricultural products into Israel. Now, Israel's acting Prime Minister Ehud Olmert says he has not ruled out peace talks with the Palestinians.

Mr. Olmert tells Israel TV that the chances of reaching a quick agreement with the Palestinians are smaller now that Hamas in charge in the Palestinian territories. But, he says hope has not disappeared. Israel's acting prime minister says he will pursue a two-pronged strategy of battling Hamas and trying to reach a peace agreement.

Israel, the United States, Russia, and the European Union say that Hamas must recognize Israel and renounce violence if the group wants to gain international acceptance. Hamas has rejected those conditions.

Hamas leaders are engaged in a diplomatic offensive trying, so far unsuccessfully, to convince Arab states to step in and make up any budget shortfall that might result from the cutoff of aid from international donors, and the suspension of tax and customs duties from Israel.

Hamas leaders have also not been able to get other major Palestinian factions to join their new government, despite naming Ismail Haniyeh, a perceived moderate as prime minister. Hamas hardliner Mahmoud Zahar, the group's leader in the Gaza Strip says Hamas is united behind its prime minister.

Zahar says Hamas has told the Palestinian Authority and other Palestinians that Ismail Haniyeh now speaks for Hamas and the group is united behind him as prime minister.

Meanwhile, Mr. Olmert was harshly criticized by the man expected to be his main rival in upcoming Israel elections on March 28, Likud Party Chairman Benjamin Netanyahu, who is trailing in public opinion polls.

Netanyahu, says Mr. Olmert never should have allowed the Palestinian parliamentary elections to go forward. The Likud leader says that, if elected, he would pursue a policy the exact opposite of what he described as Mr. Olmert's policy of disengagement from territory now controlled by Israel.