(Adds U.S. State Department comments) JERUSALEM, April 18 (Reuters) - Palestinian Finance Minister Salam Fayyad said he was hopeful that the United States would ease banking sanctions that have paralysed the Palestinian government for more than a year. Fayyad made the comments in interviews with Palestinian newspapers published on Wednesday after meetings in Washington with U.S. Secretary of State Condoleezza Rice and other senior Bush administration officials. The State Department made clear it had no intention of lifting sanctions against the Hamas-led government but said the Bush administration was considering whether to make it easier for funds to flow to accounts held by the Palestine Liberation Organisation, which has signed interim peace deals with Israel. Those PLO accounts fall under the control of Fayyad and Palestinian President Mahmoud Abbas of Fatah. Western diplomats said Fayyad could try to use the PLO accounts to pay long-overdue government salaries, but doing so could create regulatory and legal problems. "The secretary (Rice) has expressed understanding to linking our ability to improve financial performance and the need to function freely with the banks," Fayyad told the al-Ayyam newspaper. The banking restrictions have been in place since Hamas Islamists came to power in March 2006, forcing donors to redirect funds to Abbas's office and a European aid mechanism. SUITCASES Hamas has resorted to bringing in cash in suitcases. The sanctions have prevented the Palestinian government from paying its workers their full salaries in over a year. Hamas and Fatah formed a unity government last month, hoping to stem fighting between the groups and ease the sanctions. State Department spokesman Sean McCormack told reporters in Washington that Fayyad had access to the PLO accounts because of his role as an adviser to the organisation and not because of his position as finance minister. "The question is one of what kinds of assurances might be provided or might be necessary from the Treasury Department to assure the banking system ... give the green light to be able to work with those particular accounts," McCormack said. Since funds have been funnelled through Abbas's office for months, it is unclear how using the PLO accounts will make a major difference in Fayyad's efforts to reestablish the Finance Ministry's direct control over government accounts. "Slowly, slowly it (the economic embargo) is loosening. But they have a lot of obstacles," said a senior Israeli security source involved in maintaining the economic sanctions. A Western diplomat involved in the matter said allowing transfers to the PLO accounts might not solve the problem. "The issue is whether the Finance Ministry itself can operate accounts," the diplomat said. Israel has vowed to shun the entire unity government, including Fayyad, but the United States and the European Union have authorised contacts with non-Hamas ministers like Fayyad. A decision by Washington to ease the banking embargo would amount to a policy break with Israel, which wants the freeze on funds to remain in place to keep pressure on Hamas to recognise Israel, renounce violence and abide by interim peace deals. Banks in the region are especially vulnerable to U.S. and Israeli pressure because they rely on "correspondent" financial institutions in Israel and the United States for day-to-day transactions in shekels and dollars. Under U.S. law, any foreign bank that refuses to cooperate with the United States in cutting off funding to Hamas could have its U.S. assets frozen and lose its access to U.S. financial markets. U.S. banks could, in turn, be required to terminate any correspondent accounts. (Reporting by Adam Entous in Jerusalem, Wafa Amr in Ramallah and Arshad Mohammed in Washington)
