Israel has said it will work with the Palestinian leader Mahmoud Abbas as long as he does not co-operate with Islamic militant group, Hamas.
Israel says it will not deal with a Hamas-led government
Hamas won last month's parliamentary vote in the Palestinian territories.
The group's leaders are meeting in Cairo to discuss taking charge of the Palestinian government.
Acting Israeli PM Ehud Olmert, said Israel's co-operation with Mr Abbas was also dependant on the Palestinian government not being led by Hamas.
"I have no interest in harming Palestinian Authority chairman Abu Mazen [Mr Abbas] as long as he doesn't co-operate with Hamas and as long as the Palestinian government isn't led by Hamas," Mr Olmert told an economic conference.
Mr Olmert added that Israel would continue transferring monthly tax payments to the Palestinian Authority as long as Hamas was not in control.
Israel regards Hamas as a terrorist group committed to the destruction of Israel and initially suspended payments unconditionally following the Hamas victory.
Mr Abbas has said he will ask Hamas to form the next government, but called on it to respect the previous agreements such as international peace plan known as the roadmap.
Hamas officials from the Gaza Strip are in Egypt, meeting leaders who live in exile. The meetings started on Monday and are expected to continue on Tuesday.
The Hamas leaders are expected to discuss the possibility of forming a coalition with the previous governing party, Fatah, which so far has rejected calls for a national unity government.
They are also expected to meet senior Egyptian officials, who have called on Hamas to renounce violence and recognise Israel before taking power.
There is some speculation of a split in Hamas on how to proceed
A Hamas delegation is then expected to tour Arab capitals to seek financial support for their administration.
Hamas officials and Palestinian leader Mahmoud Abbas have agreed to convene parliament on 16 February, starting the process of forming a new government.
The exiled leaders are based in Lebanon and Syria.
Hamas leaders in the West Bank have no way of reaching the meetings in the Egyptian capital.
On Sunday the Palestinian Attorney General Ahmed al-Moghani announced that $700m (£397m) worth of aid had gone missing under previous leadership.
Mr Moghani is carrying out an investigation into alleged corruption.