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The Canadian government has restored $8-million in funding to the Palestinian Authority, saying it is encouraged by efforts by Palestinian president Mahmoud Abbas to renew the peace process and deal with the Authority's internal problems, including rampant corruption.

The long-expected announcement reverses a controversial decision taken by Prime Minister Stephen Harper just after his election 18 months ago to cut off aid and diplomatic ties to the Authority to protest against the victory of Hamas in Palestinian legislative elections. Canada and other Western nations consider Hamas, an Islamic militant organization, to be a terrorist group.

But with the violent takeover of Gaza by Hamas last month, president Abbas's more moderate Fatah Party has taken control of the rest of the Palestinian territory and Western countries have begun to restore aid to the Authority.

"The Government of Canada welcomes the leadership of president Abbas and prime minister [Salam]Fayyad in establishing a government that Canada and the rest of the international community can work with," Foreign Affairs Minister Peter MacKay said.

The money will be granted by the Canada International Development Agency "in direct support to the new government" and will focus on priorities established by Mr. Fayyad, including security as well as democratic, social and economic development.

Canada will also give $1-million to the International Committee of the Red Cross to meet immediate humanitarian needs in Gaza. "The humanitarian problem in Gaza concerns us," he said.

Mr. MacKay said there could be further announcements of additional funds for the Palestinians. "This is not a final amount," he told reporters in a conference call.

He said that there have "certain indications" of positive steps being taken by Mr. Abbas to reform Fatah and deal with internal governance issues, including widespread corruption.

Mr. MacKay insisted that there was "reason for optimism" that the new U.S.-led effort for a Mideast peace conference, called for later this year, would yield results.

Amin Abou-Hassira, who heads the Palestinian Authority's delegation in Canada, welcomed Canada's decision to restore the funding but said the initial $8-million was not enough.

"We hope there will be more money because the needs are very great," he said in an interview.

He also expressed the hope that the Harper government would now take "a more balanced view" of the Israeli-Palestinian dispute.

In March of 2006, Canada was the first country after Israel to cut off aid and diplomatic ties with the Palestinian Authority after Hamas's election victory. That move was praised by pro-Israel groups but was slammed by Arab Canadians as a sign that Mr. Harper was abandoning Canada's more neutral stand on the Mideast in favour of a markedly pro-Israel position.

That pro-Israel shift was seen as part of an effort by the Tories to court support from the Jewish community, which has traditionally been strongly in the Liberal camp.

Shimon Fogel, chief executive of the Canada-Israel Committee, said Monday that he did not believe the reinstatement of the funds would in any way "undercut the appreciation the pro-Israel community has for the Harper government."

He admitted that his group was less than enthusiastic about restoration of the funds, due to continuing concerns over president Abbas's track record. "He's better than Hamas, although it's not as if he wasn't deficient and inadequate in his own way," Mr. Fogel said.

"The guy doesn't merit carte blanche. He still has to earn the confidence of Canadians."

As for the money going to Gaza, Mr. Fogel said that "we believe that there are people that are trapped in a horrible situation who need humanitarian assistance and we're glad that Canada is helping."