The United States will cancel or suspend up to $411 million over several years, but some of the money will be redirected to humanitarian projects, the State Department announced.
The European Commission announced a similar move. Commission spokeswoman Emma Udwin said the decision was based on a policy of "maximum prudence." The decision will be reviewed when the foreign ministers of the 25-nation bloc meet in Luxembourg Monday.
The Commission and EU governments have been supporting the Palestinian Authority since its creation under the 1993 Oslo peace accords: the current level was over $600 million a year.
The freeze covers all direct aid to the Palestinian government, around $37 million, which includes most public employees' salaries, but does not include humanitarian aid through international and nongovernmental organizations.
Last month the EU redirected aid money to pay Palestinian electricity bills directly to suppliers, including the Israeli electricity company, without going through the government.
The new Palestinian prime minister, Ismail Haniyeh, condemned the move, saying the international community was "punishing the Palestinian people for practicing their (democratic) choice."
"This is a continuation of hasty decisions ... that will increase the suffering of the Palestinian people and provide a cover for the Israeli occupation."
Hamas has stated it would not betray its constituency by reviewing its position, however new Hamas Foreign Minister Mahmoud al-Zahar recently appeared willing to talk about a ''two-state solution"-- code for co-existence with Israel -- first in a letter to U.N. Secretary-General Kofi Annan, and then later in an interview with a London newspaper.
"Let us speak about what is the meaning of the two-state solution," Zahar was quoted as saying, according to Reuters. "We will ask them what is their concept concerning the two-state solution."
Hamas officials in the West Bank denied that the Islamic group was headed in a new direction.
"This talk is not correct ... Hamas won't change its thinking and won't introduce such a massive shift in its thinking and risk losing its constituency," Deputy Prime Minister Naser al-Shaer told Reuters.