The deal between Hamas and Fatah to form a Palestinian unity government may not satisfy the US or Israel but opens the door for Arab and some European states to ease the crippling economic blockade.
The deal, signed by the rival factions in Mecca last week, puts the US and Israel in a difficult bind, committed to a strategy of strengthening Palestinian President Mahmoud Abbas of Fatah in his power struggle with Hamas Islamists.
Washington has few alternatives to Mr Abbas, a moderate who favours a two-state solution to the conflict, and can ill afford a row with Saudi Arabia and its other Arab allies at a time when it needs their support to combat Iran's nuclear programme and stem the violence in Iraq.
Senior Fatah official Sufian Abu Zaida said the goal of the unity government deal was to end the factional fighting that has raged for months between the factions, rather than meet the three conditions set out by the Quartet of Middle East mediators for ending the economic blockade.
"They did not think of Condoleezza Rice, (US President George W.) Bush, Israel, the Americans, the Quartet. ...Mainly they considered how to avoid bloodshed," he told Israel Radio.
Hani Habib, a Palestinian political analyst, said an agreement was reached on a unity government because neither side was strong enough to win militarily. The US has pledged $86 million to strengthen Ms Abbas's forces; Hamas receives support for Iran and other Islamist allies.
The US has struggled for months within the Quartet to maintain the sanctions regime. The European Union, Russia and the United Nations have long pressed for changes to ease the funding crunch. In a sign the unity government deal may widen the rift, French Foreign Minister Philippe Douste-Blazy said he supported the accord and called for international backing.
The European Union said it would study the new administration "in a positive but cautious manner."
Western diplomats said Saudi Arabia and other US allies in the region would provide the bulk of funding to the unity government, clearing the way for full salary payments for the first time since Hamas came to power last March.
European diplomats based in the Middle East said they expected some EU member states to resume diplomatic contacts as a first step. Aid pledges would be considered later, they said.
It remains to be seen whether Washington will try to prevent others from easing the embargo, which has pushed the Palestinian Authority to the brink of financial collapse but failed to unseat Hamas.
US diplomats have told their Israeli counterparts Washington opposed any government headed by a Hamas member, as called for under the unity agreement, Israeli officials said.
The Mecca agreement also makes no direct mention of recognising Israel and calls for the new administration to "respect," rather than commit to or accept, past agreements, as demanded by Israel and the US.
While an injection of Saudi funds would help the Palestinian economy rebound, without US and Israeli support the Palestinian government's financial woes are unlikely to end any time soon, diplomats monitoring the financial embargo said. Israel has been withholding Palestinian tax revenues since Hamas came to power and made clear on Friday that it would only lift its boycott if the new government clearly renounces violence, recognises Israel and honours interim peace agreements, the three conditions set by the Quartet.
Diplomats said it is also unclear whether international and regional banks will resume transferring funds to the Palestinian government without Washington's explicit approval.
"The Europeans may take diplomatic actions but the main factors for removing the embargo are the tax revenues and the ability of banks to work again," said one of the diplomats.
Mouin Rabbani, of the International Crisis Group, said the unity agreement may strain relations between Washington and Mr Abbas. "But are they going to try to shift their support away from him? I really don't think that's an option," he said.
Israeli officials were more hostile.
"Abu Mazen failed completely and he awarded a significant victory to Hamas," Tzachi Hanegbi, who heads the foreign affairs committee of the Israeli parliament, told Israel Radio, referring to Mr Abbas by his nickname.
"As a result, the chance of advancing an effective initiative and an agreement between Israel and the Palestinians has receded," Mr Hanegbi said.
Israeli officials said the unity deal cast doubts on the prospects of a three-way summit scheduled for February 19 between Mr Abbas, Israeli Prime Minister Ehud Olmert and US Secretary of State Condoleezza Rice.
If the February 19 summit goes forward, Israeli officials said the unity government deal would make it difficult, if not impossible, for Mr Olmert to make any gestures to Mr Abbas.