Hamas says PA coffers are 'empty'

Mr Haniya said he would make every effort to pay employees

The Palestinian prime minister has told the first meeting of his Hamas-led cabinet that the government is facing a deep financial crisis.

Ismail Haniya says his administration inherited a finance ministry that had no money left, yet had mounting debts.

He said the new leadership would do its best to pay the wages of more than 100,000 Palestinian Authority workers.

Aid donors have threatened to cut funds to the PA if Hamas does not change its doctrine of non-recognition of Israel.

"We are making every effort to pay the government employees despite the financial crisis," Mr Haniya said.

"We inherited a situation in which we not only have no money in the treasury but a whole load of debts."

We look forward for our people to live in freedom and independence, side by side with our neighbours in this sacred part of the world Letter of Mahmoud Zahhar, foreign minister

The meeting came as Foreign Minister Mahmoud Zahhar denied suggesting that Hamas was countenancing a two-state solution in a letter to the United Nations.

The AFP news agency published what it said were extracts from the letter.

"We look forward to live in peace and security and for our people to live a dignified life in freedom and independence, side by side with our neighbours in this sacred part of the world," the text says.

It goes on to say Israel's "illegal colonial policies... diminish any hopes for the achievement of settlement and people based on a two-state solution".

The two-state formula, enshrined in the international peace plan known as the roadmap, would see the establishment of an independent Palestinian state living in peace beside Israel.

Hamas, which denies Israel's legitimacy and refuses to follow a path of non-violence and adopt past peace deals, has always rejected this formula.

Israeli moves

In a separate development, Israel's president is preparing to formally ask interim Prime Minister Ehud Olmert to form a government, after his Kadima party came top in elections last week.

A presidential statement said the announcement would be made at a news conference on Thursday, following a meeting between Mr Olmert and President Moshe Katsav.

On Wednesday, the central election committee released the final figures, confirming that Kadima won 29 seats in the 120-seat Knesset.

Mr Olmert will have six weeks to form a government - for which he will need several coalition partners.

On Tuesday he said the left-centre Labour Party, which supports his plan to withdraw from parts of the occupied West Bank, would be his most senior partner in government.