May 19, 3:28 AM EDT

By STEVEN GUTKIN

source

Associated Press Writer

DEIR EL-BALAH REFUGEE CAMP, Gaza Strip (AP) -- Hamas' recent victories in dozens of local elections pose a sharp dilemma for the U.S. and Israel. Locked into relationships with towns now controlled by militants, they have little choice but to deal with the group the U.S. lists as a terrorist organization.

Israel and newly elected Hamas-backed mayors confirm they will cooperate on matters such as sanitation, water and electricity, though Israel says it will not speak to anyone directly linked to violence.

The U.S. is still debating what to do about the millions of aid dollars staked in Hamas-run towns, though projects already approved will not stop in midstream, said Sylvana Foa, spokeswoman for USAID.

Some argue that dealing with Hamas will help curb its extremist tendencies by encouraging its transformation into a responsible public custodian. Others say contact at any level with a group sworn to the Jewish state's destruction endangers fledgling peace hopes by propping up violent hardliners.

The fragility of a four-month cease-fire was brought home Wednesday when an Israeli aircraft fired at Hamas militants who launched more than a dozen mortar shells at a Jewish settlement in Gaza.

Hamas' electoral victories underscore a key problem for President Bush as he pushes for Mideast democracy: When people are free to choose, Washington can't count on a friendly result.

Ahmad El Kurd, the Hamas-backed mayor of the poverty-stricken town of Deir El Balah, gives a tour of squalid shacks in his town's refugee camp and says denying aid will only create more hatred.

"We're not talking about politics. We're talking about human beings," he says.

Along with the United States, Israel and the European Union list Hamas, which has carried out dozens of suicide bombings, as a terrorist organization.

Even so, Israel has long maintained discreet contact with the group, mostly to exchange information on local issues, such as building mosques, said Shlomo Dror, spokesman for the Civil Administration, the military unit that administers the West Bank and Gaza.

"We will help anyone who doesn't take part in terror activities and doesn't constitute a terror threat," he said.

Likewise, El Kurd said his town is "open to receiving help from any country in the world, including Israel."

And Mohammed al-Masri, the Hamas-affiliated deputy mayor of the West Bank town of Qalqiliya, added: "We have no problem talking with anybody who can help us."

In balloting earlier this month, Hamas swept all 15 local council seats in Qalqiliya, a town that throws its garbage into the same dump as the neighboring Israeli town of Kfar Saba.

Many Hamas-backed candidates elected in three rounds of municipal elections since December are not actual Hamas members. Many ran on Hamas-affiliated tickets to capitalize on widespread frustration over corruption in the ruling Fatah Party.

The indirect link could provide political cover for maintaining cooperation in municipal affairs - especially in towns where such contact is necessary because of shared water, electrical and sewage systems.

"We can't say this is the Israeli environment and this is the Palestinian environment," said Mustafa el-Hawi, an official at the Palestinian Planning Ministry. "We have to put our hands together."

At least one U.S. aid project in the Palestinian territories was recently canceled because of its administrators' suspected links to violence, Palestinian and U.S. officials confirmed.

Washington prohibits all contact with Hamas and "will not do business" with the group, said USAID's Foa. She added, however, that there's been no decision on what to do about aid projects in towns where Hamas has won control and that the issue is "being debated at very, very high levels in Washington."

She said officials were still deciding what to do about $200 million earmarked for new projects.

El Kurd says the issue is a big test for President Bush's drive for Mideast democracy.

"They're going to punish Palestinians for exercising democracy, for good performance and for choosing their own path," he said. "This doesn't bring peace but instead increases the feelings of hatred."

El Kurd drove a reporter around his town's shabby refugee camp, showing off new roads and water projects that he and a number of residents said constituted a welcome break from his Fatah predecessor's perceived inefficacy.

"We voted for these people because we wanted clean hands, honest people," said 62-year-old Mohammed Bashir, who runs a garage in the camp.

El Kurd walked into a fly-infested shack inhabited by a large family sharing its living quarters with a horse and chickens, and said he needs donor money to relocate the family so that a road can be built at the site.

"If the United States decides to stop providing funds, who is going to lose?" he asked.

Hamas' impressive showing in the municipal voting - winning more than a third of the 120 communities up for grabs, including some of the largest ones - is seen as a harbinger for what's likely to come during Palestinian parliamentary elections set for July.

Israel sees Hamas' decision to join the political process as a threat. Prime Minister Ariel Sharon has criticized Palestinian leader Mahmoud Abbas for choosing to co-opt the militants rather than crush them.

At a meeting last week with European Union ambassadors, Israeli Foreign Minister Silvan Shalom warned against any dialogue with Hamas, saying the EU's decision to include Hamas on its list of terror groups had helped deny the group funds and contributed to a decrease in attacks.