(Adds U.S. comment, paragraphs 7, 8) By Alistair Lyon JERUSALEM, March 20 (Reuters) - A senior U.S. diplomat met Palestinian Finance Minister Salam Fayyad on Tuesday, denting Israel's drive to maintain an international boycott of the new Palestinian unity government. Fayyad's meeting with U.S. Consul-General Jacob Walles was the first contact between a U.S. official and a minister in the coalition cabinet formed on Saturday by the Islamist Hamas movement and the rival secular Fatah faction. The United Nations also said it would hold diplomatic contacts with non-Hamas ministers, having previously confined such talks to humanitarian issues. Alvaro de Soto, the U.N. special envoy to the Middle East, will meet Fayyad and Palestinian Foreign Minister Ziad Abu Amr on Wednesday, officials said. Trying to stop erosion of the diplomatic boycott, Israel cancelled a planned meeting with Norway's deputy foreign minister after he held talks with Palestinian Prime Minister Ismail Haniyeh of Hamas, Israeli officials said. The United States, breaking with Israel, has said it might hold unofficial contacts with non-Hamas ministers. Britain and some other European countries have taken a similar line. U.S. State Department spokesman Sean McCormack confirmed Walles met with Fayyad, an independent, as part of "an ongoing dialogue". Washington "will not suspend contact with individual Palestinians solely on the ground that they hold office in the unity government. We will make individual decisions based on our evaluation of the situation," McCormack said. A Western-backed reformer, Fayyad runs the Palestine Liberation Organisation's finances in addition to his ministerial duties. Fayyad said his talks with Walles were to seek ways "to lift the unjust siege imposed on us", a reference to the aid embargo imposed by the West after Hamas came to power last year following its defeat of Fatah in a parliamentary election. The United States has said there would be no change in that blockade unless the new government met conditions set by the Quartet -- the United States, the European Union, Russia and the United Nations -- to recognise Israel, renounce violence and accept past peace deals. Israeli Prime Minister Ehud Olmert has vowed to shun the entire unity government, saying its platform does not meet the Quartet's conditions. DEEPENING POVERTY The ban on direct aid to the Palestinian Authority has meant that for the past year it has been unable to pay in full its 161,000 employees, who support about a million Palestinians, deepening poverty in the West Bank and Gaza Strip. Israeli officials said they had scrapped the meeting with Norwegian Deputy Foreign Minister Raymond Johansen under a policy instituted after Hamas won power last year. Johansen visited Haniyeh on Gaza on Monday, becoming the first Western government official to engage directly with the Hamas leadership since the formation of the unity cabinet. His visit came three days after Norway urged Israel and the international community to work with Haniyeh's new government and release frozen funds to Palestinian authorities. "Foreign dignitaries who meet with the Hamas leadership will not have meetings with Israeli officials. This was a decision taken in 2006," Foreign Ministry spokesman Mark Regev said. "By recognising an unreformed extremist, you are reinforcing that extremism." Johansen told Reuters by telephone that he regretted the Israeli decision and hoped it would be temporary. He said he had told the Palestinian government it must follow through on its commitments to peace. Norway helped to broker the 1993 Oslo accords which led to the creation of the Palestinian Authority. The agreement later collapsed amid renewed violence. (Additional reporting by Adam Entous in Jerusalem, Aasa Christine Stoltz in Oslo)
