The diplomatic-security cabinet voted Thursday to suspend negotiations with the Palestinian Authority in the wake of the PA's unity agreement with Hamas the previous day.

At the end of five hours of discussion, the mini-cabinet voted unanimously to halt the peace talks, whose allotted time runs out on Tuesday, until the make-up of the new Palestinian government and its policy become clear.

The European Union said Thursday that it welcomes the Palestinian reconciliation deal, but emphasized that peace talks with Israel are still a top priority.

"The European Union believes that the reconciliation agreement between Fatah and Hamas is an important step toward a two-state solution,' Haaretz was told by Michael Mann, spokesperson of EU High Representative for Foreign Affairs and Security Policy Catherine Ashton. "But the top priority remains the continuation of peace talks between Israel and the Palestinians."

A senior official said Israel wanted to see if a new Palestinian government that included Hamas would accept the Mideast Quartet's conditions: recognition of Israel, setting aside of violence, and honoring of past agreements between Israel and the PA. Only after this question was answered would Israel decide whether to renew the talks or not, the official said.

The cabinet also reiterated its past decision to hold back on Israel's scheduled May 1 transfer of customs duties it collects on the PA's behalf from Palestinians returning to the West Bank. Other punitive steps were taken, including the barring of Palestinian banks from depositing money in Israeli banks.

During the meeting, several cabinet ministers proposed ending the peace talks once and for all, but Justice Minister Tzipi Livni, Israel's co-negotiator at the talks, insisted on only a suspension pending clarifications about the prospective Palestinian government.

The cabinet decision reads: "Israel will not conduct negotiations with a Palestinian government backed by Hamas, a terrorist organization that calls for Israel's destruction."

Prime Minister Benjamin Netanyahu said: "Instead of choosing peace, Abu Mazen [Abbas] has formed an alliance with a murderous terrorist organization that calls for ... Muslims to fight and kill Jews."

He added: "Hamas has fired more than 10,000 missiles and rockets at Israeli territory and has not halted terrorist actions against Israel even for a minute. The agreement between Abu Mazen and Hamas was signed even as Israel is making efforts to advance the negotiations with the Palestinians."

Netanyahu described the Fatah-Hamas unity pact as "the direct continuation of the Palestinians' refusal to advance the negotiations. Whoever chooses the terrorism of Hamas does not want peace."

Netanyahu went on a media offensive on foreign TV shows, telling NBC-TV that he hoped Abbas reversed his decision to join forces with Hamas, and adding. "I will be there in the future if we have a partner who is committed to peace."

In the first official Palestinian response to the suspension of talks, Chief Palestinian Negotiator Saeb Erekat said, "We will consider all options in response to the Israeli decision."

Economy Minister Naftali Bennett said the cabinet decision was "balanced and correct in light of the new situation." He added: "There's no talking with murderers."

Livni was asked in an interview with Channel 2 if she still considered Abbas a partner for peace talks. "It could be that that is a political maneuver by Abu Mazen, but Hamas is a terrorist organization that does not recognize our existence," she said.

"Abu Mazen took decisions that are not good for the peace process, [and] he took them at very delicate points in time," Livni continued. If he is a partner, we'll have to wait and see. I don't like to use the expression 'partner.' He is the representative of the other side."

Opposition leader Isaac Herzog of Labor said: "Today I ask the prime minister: Do you think your decisions help to strengthen Israel's security? Because if we close the book on a peace agreement, you have to present an alternative for how to prevent [Israel's becoming] a binational state. If I were prime minister, instead of being surprised again and again by events, I would present, once and for all, an Israeli proposal for a peace agreement that would win international support, with all the security and diplomatic guarantees."

Meretz leader MK Zahava Gal-On said the diplomatic-security cabinet's decision "unmasked the true face of the Netanyahu government, which has been looking for a pretense to torpedo the negotiations. Instead of seeing the reconciliation agreement as an opportunity, it punishes Abu Mazen, imposes sanctions on the PA and gives a prize to Hamas.

"Today," Gal-On continued, "we also saw the unmasking of [Finance Minister] Yair Lapid, who justified sitting in this fanatic, rotten government as a means of advancing a peace agreement, but was exposed as a supporter of the right-wing settler fanaticism of Bennett, Lieberman and Co. This was all to hold on tight to his cabinet seat at the expense of loyalty to his constituents."