End near to Palestinian boycott?

By Jonathan Marcus
BBC diplomatic correspondent

An international boycott has crippled the Palestinian economy

The agreement to form a Palestinian government of national unity comes against the backdrop of a mounting economic and human crisis in the Palestinian territories.

Its significance is that it may offer a way to end the boycott of the existing Hamas government by Israel and key Western governments.

This is a small sign of diplomatic movement in a wider regional landscape that shows few indications of dynamism.

The British Prime Minister Tony Blair

was holding talks with President Mahmoud Abbas only on Sunday.

His spokesman welcomed the statement from the Palestinian leader saying that "potentially", this was "a highly significant announcement".

Palestinian isolation

As one British source noted: "This might lead to a Palestinian government that the international community can deal with."

Ever since Hamas swept into power in the elections last January, the new Palestinian government has faced a growing economic boycott from Israel and key international players like the European Union and the United States.

This has largely isolated the Palestinian territories and dramatically cut the funding going to them.

Many public sector workers have not been paid in months

So could a new broadly-based Palestinian government be the means of escaping this crisis ?

Much depends upon its programme.

The international community still demands that the Palestinians end violence, recognise Israel and agree to be bound by all existing agreements relating to the peace process.

There are indications that Hamas has agreed to accept a 2002 Arab peace plan which could potentially be seen as indirectly recognising Israel.

Much though will depend upon Israel's response.

Prime Minister Ehud Olmert's government has been battered by the Lebanon crisis.

He says he is willing to talk to the Palestinian president.

But top of his agenda remains the return of an Israeli soldier captured by Palestinian militants rather than any new initiative on the path to peace.