The rival Hamas and Fatah groups reached a final agreement Thursday for a unity government aimed at putting a stop to months of factional violence that brought the Palestinians to the brink of a civil war.
Israel, however, was quick to reject cooperation with the new cabinet, which is slated to be confirmed by the Palestinian parliament on Saturday.
By filling key ministries with independents and declaring a willingness to "respect" peace agreements with Israel, the Palestinians are hoping to splinter a US-led embargo on direct aid imposed after the militant Islamic group Hamas trounced the more moderate Fatah Party in elections last year.
In light of the unity agreement, the European Union may consider ways to resume direct aid and phase out the economic embargo, which has crippled the Palestinian government's ability to provide key services to its people. If the US and Europe continue the ban, say analysts, the financial strain is likely to aggravate the collaboration between the two ideological rivals on making peace with Israel.
"There is a birth of a new government in Palestine, but I think the government will encounter a few challenges," says Bassem Ezbidi, a political science professor at Birzeit University, located near the West Bank town of Ramallah. "There's deep internal disharmony when it comes to the big political issues."
Mr. Ezbidi says that donors may extend aid on the condition that it does not end up in the hands of Hamas politicians.
Last year, about $700 million in foreign aid to the Palestinians was directed through the office of President Mahmoud Abbas, the moderate Fatah leader, in order to bypass the Hamas cabinet.
Although Abbas will continue to press for peace negotiations with Israel, the new government's policy guidelines don't meet all of the international conditions to lift the ban: recognition of Israel, a forswearing of violence, and a commitment to honor international peace accords.
Instead, the unity government platform contains no recognition of Israel and reportedly reaffirms that armed resistance to the Israeli occupation in the West Bank is a legitimate right of the Palestinians.
The platform also reportedly contains a requirement that any future peace deals with Israel will be subject to a public referendum.
"We are optimistic and believe that this government will open up a new era," said Palestinian Prime Minister Ismail Haniyeh, as he submitted the lineup of the new government's ministers to Abbas in a meeting in Gaza City.
Hamas's victory in parliamentary elections a year ago immediately spawned tension with the deposed Fatah Party, which led to deadly intermittent street battles between militias linked with the political parties. In recent months, dozens of Palestinians were killed as the tide of Hamas-Fatah violence threatened to spin out of control.
A unity agreement brokered in the Saudi city of Mecca last month curtailed the clashes, but even as the sides approached the final deal this week, members of Hamas and Fatah were killed in several Gaza skirmishes.
Mr. Haniyeh will continue to preside over the new unity government, but the top posts of foreign minister, finance minister, and interior minister will be filled by Palestinians who are members of neither Hamas nor Fatah.
The finance minister will be Salam Fayyad, a former World Bank official who instituted reforms to make the Palestinian budget more transparent before running for parliament. Ziyad Abu Amr, a political science professor and legislator, was selected as foreign minister, replacing Hamas hard-liner Mahmoud Zahar.
After months of wrangling over the sensitive position of interior minister – the cabinet member responsible for the security services – the sides agreed on Hani al-Qawasmi, an independent considered sympathetic to Hamas.
A senior Israeli official reportedly called the establishment of the Palestinian unity government "a big step backward."
With Hamas alone running the Palestinian government, Israel enjoyed the backing of the so-called "Quartet" of Middle East peace negotiators – the US, the United Nations, the EU, and Russia – in a boycott of ties and financial aid to the Palestinians.
But the new unity government may prompt the EU to break with the US and Israel, analysts say.
David Makovsky, a fellow at the Washington Institute for Near East Policy, says that European diplomats are likely to deal with Fatah ministers and leave open the possibility of contacts with Hamas ministers based on the government's performance. It's unclear, however, whether the Europeans will restore direct aid.
"The Europeans see this as a step forward because Hamas is coming closer to Abbas by agreeing to a government with fewer Hamas members in it and by saying they have to respect past agreements," he says. "Part of the European general belief is that dialogue is better than confrontation. But Europeans don't want to anger [Secretary of State Condoleezza] Rice right now, and they don't know if [the government] is going to work."