P.A. Prime Minister Salam Fayyad addresses a news conference in Ramallah on Thursday, April 14, 2011. (AP Photo/Majdi Mohammed)

(CNSNews.com) – Palestinian Authority chairman Mahmoud Abbas’ Fatah faction has agreed to form a unity government with Hamas that excludes Prime Minister Salam Fayyad, a U.S.-trained economist who has won praise from Western governments but is opposed by the terrorist group that controls Gaza.

The decision will turn attention back to the issue of U.S. funding for a government that includes members of a group designated as a foreign terrorist organization under U.S. law.

When the rival factions first signed a reconciliation deal last May, Obama administration officials said it would wait to see the makeup and policies of the unity government that resulted before determining whether there would be implications for U.S. funding.

Up to now, the administration has held to longstanding U.S. policy that if Hamas wants a political role it must meet criteria established by the Mideast “Quartet” – the U.S., Russia, European Union and U.N. – which says it must recognize Israel’s right to exist, renounce violence, and adhere to previous agreements signed between Israeli and P.A. leaders.

Those criteria are also contained in a U.S. law, the 2006 Palestinian Anti-Terrorism Act, which makes federal assistance to the P.A. conditional on its compliance with obligations to renounce and combat violence, recognize Israel’s right to exist, and abide by existing agreements.

The top Republican and Democrat on the U.S. House Appropriations subcommittee dealing with foreign aid, Reps. Kay Granger (Tex.) and Nita Lowey (N.Y.), warned Abbas in writing earlier this year that forming a government with Hamas “threaten[s] the provision of United States’ assistance and support.”

The administration has requested around $550 million in bilateral assistance to the P.A. for fiscal year 2012.

Palestinian President Mahmoud Abbas holds a letter requesting recognition of Palestine as a state as he addresses the 66th session of the United Nations General Assembly at UN Headquarters, Friday, Sept. 23, 2011. (AP/Richard Drew)

This week’s long-delayed decision on implementing the May reconciliation agreement, held up in part over Hamas’ demands to exclude Fayyad, came several days after a U.N. Security Council committee shot down Abbas’ application for U.N. membership for “Palestine.”

The committee reported Friday that as members were divided on the issue it was unable to make a unanimous recommendation on the matter to the council.

Among the concerns cited was the fact that Hamas controls 40 percent of the Palestinian population, raising questions about the P.A.’s claim to be an effective government.

Hamas’ entry into a unity government may settle those questions, but then another concern aired by the Security Council committee arises: Can the Palestinians claim to constitute a “peace-loving state” – a requirement for U.N. membership – while Hamas refuses to renounce terrorism?

The agreement on a caretaker government was reached during talks mediated by Egypt and announced Tuesday. Palestinian media said Abbas and Hamas leader Khalid Meshaal would meet in Cairo later this month, and that parliamentary elections would be scheduled for next May.

Those elections are already 22 months overdue, while local elections have been postponed three times since January 2010. (Abbas’ own four-year presidential mandate expired in January 2009. His tenure was “extended” by decree for a year beyond that but scheduled Jan. 2010 presidential elections were then postponed indefinitely, also by decree.)

Fayyad told reporters on Tuesday that Fatah and Hamas must settle on a new prime minister and stop claiming that his participation presents an obstacle to forming a unity government.

Fayyad, who is not a member of Fatah or Hamas, was appointed to his post by Abbas in 2007.  Abbas’ decision to exclude him now at Hamas’ insistence will be a blow to the U.S. and European governments which fund the P.A., as Fayyad is generally well regarded in Western capitals.

The last parliamentary elections, in 2006, were won by Hamas, an outcome that presented a dilemma to the Bush administration, which had encouraged the P.A. to hold the elections.

It was then that the Quartet laid down its criteria. When Hamas refused to meet the conditions, tensions grew between it and the Fatah-led P.A. grew, leading eventually to Hamas seizing control of the Gaza Strip in 2007 after routing P.A. forces loyal to the West Bank-based Abbas.

With Gaza under the control of an Iranian-backed group whose charter calls for Israel’s destruction, the Israeli government sealed the crossing-points, later tightening the security blockade in response to rocket attacks from the territory.

Years of persistent rocket attacks resulted finally in a major, three-week Israeli military campaign in Dec. 2008-Jan. 2009.

Tensions have been rising again over recent weeks, and Israeli jets on Monday bombed a Hamas building in northern Gaza, after yet another rocket was fired into southern Israel.