Israel has given a cautious response to the new Palestinian government agreed to in Mecca last week, in which the ruling Islamic militant group Hamas and rival and more moderate Fatah faction will share power. Meanwhile, tensions between Jews and Muslims remain high as Israel decides to proceed with a controversial construction project at a hotly disputed holy site in Jerusalem. Robert Berger reports from VOA's Jerusalem bureau.

Prime Minister Ehud Olmert says the new Palestinian government must abide by three conditions set down by the international community.

Mr. Olmert said the Hamas-led Palestinian Authority must recognize Israel, renounce violence and terror, and accept previous peace agreements. Taking a similar position to the United States and European Union, he said Israel will wait and see how the new government responds.

Hamas has met one only one of the conditions - respecting previous peace agreements. But the group seeks Israel's destruction and says it will never recognize the Jewish state.

If that does not change, Israel believes international sanctions that have crippled the Hamas-led government should remain in place.

In another Cabinet decision, ministers gave the green light for controversial construction work to continue near the Mosque of al-Aksa in Jerusalem's Old City, the third holiest place in Islam. For Jews, it is the Temple Mount, the site of the two biblical Temples and the holiest place in Judaism.

Israel began renovating a damaged walkway leading to the holy place last week, sparking violent protests by Palestinians who charge that the project could damage the foundations of the mosque.

Israeli Cabinet Minister Roni Bar-On denies that, and said Israel has the right to maintain the holy places near the Western Wall.

"We will not cave in to Muslim threats, incitement and blackmail," he said.

Ziyad Abu Zayyad, a former minister of Jerusalem Affairs in the Palestinian Authority, said Israel should reconsider.

He told Israel Radio that the Israeli government should maintain the status quo in Jerusalem and avoid provocations that raise tensions between Jews and Muslims.

Israeli police have beefed up their forces in and around the Old City, to forestall further unrest.