(Adds EU comments, paragraphs 12-13) By Adam Entous JERUSALEM, Feb 27 (Reuters) - The European Union held out the possibility on Tuesday of engaging gradually with a Palestinian unity government that responds to international demands but it cast doubt on resuming direct aid soon. The comments by EU External Relations Commissioner Benita Ferrero-Waldner and other officials came as Palestinian factions meeting in the Gaza Strip said the line-up of their unity government should be unveiled by Friday. The power-sharing deal, signed in Mecca, Saudi Arabia, earlier this month by Palestinian President Mahmoud Abbas's Fatah faction and the Islamic militant group Hamas, has widened divisions within the Quartet of Middle East mediators. Russia broke ranks with its Quartet partners, the United States, the EU and the United Nations, by telling visiting Hamas leader Khaled Meshaal on Tuesday it would try to convince the Western powers to lift a crippling aid embargo on the Hamas-led government. The EU has so far shown little sign of backing away from the Quartet's demands that the new government recognise Israel, renounce violence and accept interim peace deals, though it has shown more flexibility than Washington and Israel. Ferrero-Waldner, at the start of a visit to Israel and the occupied West Bank, said the unity government should respond to the Quartet's demands and the EU would judge it by its actions. European and Western officials said assessing the government would take time and a temporary aid mechanism, bypassing the Hamas-led government, would stay in place for as long as needed. The comments dimmed Palestinian hopes for a quick resumption of direct EU assistance once the unity government is formed. But with Israeli Foreign Minister Tzipi Livni at her side, Ferrero-Waldner said: "We have to start to have some preliminary thoughts and reflections on how we could engage, gradually maybe, a government if it responds to the Quartet principles." The Quartet cut off direct aid to the Palestinian Authority after Hamas came to power in a January 2006 election. The unity government deal contains a vague pledge to respect Israeli-Palestinian pacts but does not commit it to abide by those pacts, nor to recognise Israel and renounce violence. "The Mecca agreement is an important paper that ... most probably has avoided civil war," Ferrero-Waldner told reporters. "But we are now waiting for the next step that should be taken." She added the EU had not yet established any benchmarks for the government to convince the bloc to lift the sanctions. UNITY DEAL After talks in Gaza with Palestinian Prime Minister Ismail Haniyeh of Hamas, Fatah leaders said the two groups would unveil by Friday their choices to fill key posts in the unity cabinet. "The two groups are convinced that the formation of the government must be sped up... before anyone can try to undermine the Mecca agreement," said Fatah spokesman Abdel-Hakim Awad. Neither side revealed their choices, though the key position of finance minister has been accepted by Salam Fayyad, a U.S.-educated economist with close ties to the Bush government. Awad said the two groups had not yet agreed on who would serve as interior minister, a critical post with oversight over several large Palestinian security services, but the two names Hamas presented for the interior post were not acceptable to Fatah. "Therefore, new names need to be presented," he said. Hamas said a list could be submitted to Abbas on Saturday, when the moderate president is expected to meet Haniyeh in Gaza. The EU plans to expand aid to its Temporary International Mechanism, which provides allowances to Palestinian workers, and is proposing new channels to help some Palestinian institutions. (Additional reporting by Nidal al-Mughrabi in Gaza and Ari Rabinovitch in Jerusalem)
