Published: Nov 30, 2011 5:21 PM EST

JERUSALEM (AP) - Israel announced Wednesday that it would release tens of millions of dollars of tax funds owed to the Palestinians, ending a standoff that the Palestinians say has caused grave damage to their fragile economy.
    
The move followed heavy pressure from the United States, United Nations and Europe on Israel to free the money. Israel collects the tax funds for the Palestinians and transfers the money each month, in accordance with partial peace agreements from the 1990s.
    
Israel froze this month's transfer to punish the Palestinians for their efforts to win U.N. recognition of their independence. The Israeli decision came after the Palestinians were accepted to the U.N. cultural agency UNESCO - part of a broader effort for admission as a full member state at the United Nations.
    
Israel accuses the Palestinians of trying to bypass peace talks through the campaign. It says that a Palestinian state can be established only through a negotiated peace deal.
    
Since the UNESCO victory, the Palestinian campaign at the U.N. has stalled due to deadlock in the Security Council, which must approve full membership. Palestinian officials have not yet decided how to proceed.
    
Prime Minister Benjamin Netanyahu's office said he decided to release the money because the Palestinians appear to have suspended their "unilateral moves." It said the decision would be "reassessed" if the Palestinians resume these steps.
    
On Tuesday, however, Palestinian President Mahmoud Abbas reaffirmed that he remains committed to the bid for U.N. membership, saying recognition was the Palestinians' "legitimate right."
    
The two conflicting statements could lead to future disputes over the tax transfers and other areas of cooperation, reflecting deep mutual mistrust.
    
Israel has also hinted that it would end the payments if Abbas carries out a reconciliation agreement with the rival Hamas militant group. The Palestinians hope to hold elections next May that will end a rift that has left them with rival governments since Hamas seized control of the Gaza Strip in 2007.
    
The tax funds from customs duties and other fees are needed by the Palestinian government, the largest single employer in the Palestinian territories, to pay tens of thousands of workers, as well as security forces, which have won praise for cooperation in halting militant attacks on Israelis.
    
Palestinian Prime Minister Salam Fayyad, a U.S.-educated economist, warned that if the funds were not restored, he would be unable to pay upcoming salaries and said the Israeli punishment was causing heavy economic damage. The Palestinians have also complained that Arab nations have not fulfilled their pledges of economic aid.
    
Fayyad noted Wednesday that Israel gets a fee for collecting the Palestinian funds. "Secondly, it's very crucial to the Palestinian Authority and the Palestinian economy," he said.
    
Donor nations and even Israeli security officials urged Netanyahu to release the money, saying cash shortfalls destabilize the limited self-rule government in the West Bank.
    
The international community's Mideast envoy, Tony Blair, welcomed the Israeli decision and said the payments should be "transferred on a regular and predictable basis."
    
"This is Palestinian money which is critical to sustaining" the Palestinian Authority, he said. "Withholding these funds only benefits those who oppose peace and Israeli-Palestinian cooperation."
    
Israeli-Palestinian peace talks have been stalled for three years.
    
The Palestinians say they will not resume negotiations unless Israel halts settlement construction in the West Bank and east Jerusalem - captured territories where the Palestinians hope to establish a state. Israel says talks should resume without preconditions.
    
Abbas met Wednesday in Amman, Jordan with the head of Israel's parliamentary opposition, Tzipi Livni. She urged him to abandon unilateral moves and return to negotiations, according to a statement from her office.

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