BEIT-UL-MOQADDAS (AFP) -- Israel transferred 100 million dollars in frozen funds to the cash-strapped Palestinian Authority on Friday in an effort to bolster moderate president Mahmud Abbas, locked in a battle for power with the governing Hamas.

Israel has withheld hundreds of millions of dollars collected on behalf of the Palestinians since the radical Hamas took over the government in March last year, plunging the territories into severe economic crisis.

"This morning we transferred 100 million dollars to an account of the Palestinian presidency," a senior official in Prime Minister Ehud Olmert's office told AFP.

The money would go towards "humanitarian purposes and strengthening Palestinian president Mahmud Abbas's presidential guard as agreed upon by both sides," he said.

A Palestinian official said the Israelis had informed Abbas's office of the transfer.

The money is part of more than 600 million dollars in customs duties Israel collected on behalf of the Palestinians but which were withheld when Hamas took office after winning a landslide election victory over Abbas's Fatah in January.

Israel, the United States and the European Union consider Hamas to be a terrorist group and have cut off aid to the Palestinians because the Islamist movement refuses to renounce violence or to recognize Israel.

Since then, tens of thousands of Palestinian state employees have had only a fraction of their wages paid and international organizations have warned of an imminent collapse of the shattered Palestinian economy.

However, the Israeli official insisted that the 100 million dollars would not go towards paying salaries.

The transfer, which will help to ease the serious cash-flow crisis suffered by the Palestinian Authority, was promised by Olmert when he met Abbas on December 23.

The long-awaited encounter -- the first between the two leaders since an informal meeting in Jordan in late June -- sparked hope of a revival of the peace process that has been moribund for six years.

Immediately after the December summit, Israel released 50 million shekels (12 million dollars) in frozen custom funds which went towards paying salaries for hospital workers and buying medical equipment, a senior Israeli official told AFP.

Both sides had agreed to form a joint mechanism to decide where the remaining funds would be funneled, he said.

The United States, which has been trying to boost the position of Abbas in his power struggle with Hamas and argued in favor of releasing the frozen tax funds, welcomed the Israeli move.

"We'd certainly like to see that transfer happen as soon as possible, obviously to be done in a way in which the benefits of those funds flow to the Palestinian people and certainly don't do anything to support the Hamas-led government," said State Department deputy spokesman Tom Case.

"We're confident that the Israelis and Palestinians will be able to work out those arrangements," he told reporters.

Also on Friday, Israeli Defense Minister Amir Peretz ordered a freeze on the building of a new settlement in the occupied West Bank in the face of strong international pressure.