It comes on the heels of a decision by Mideast peacemakers to funnel humanitarian aid to the Palestinians, which Israeli Foreign Minister Tzipi Livni said Wednesday is "certainly acceptable" to Israel.
Meanwhile, Dor Energy, the Israeli company that provides fuel to the Palestinian areas, is cutting off supplies due to growing debts.
In other developments:
The statement by Justice Minister Haim Ramon, a close associate of Prime Minister Ehud Olmert's, was the first by an Israeli official to set a deadline for the Hamas-led Palestinian government to disarm and recognize the Jewish state.
The Palestinians' moderate president, Mahmoud Abbas, of the rival Fatah party, has tried to persuade Israel to bypass Hamas and resume peace talks with him, but Olmert has said he wouldn't negotiate with Abbas if Hamas didn't change its violent ways.
"Through the end of this year, 2006, there will be honest attempts to talk to the other side," Ramon told Israel's Army Radio.
"If it becomes clear by the end of the year that we really have no partner, and the international community is also convinced of this, then we will take our fate into our own hands and not leave our fate in the hands of our enemies," he added.
While the cash strapped Hamas government welcomed the resumption of international aid, it said it could not agree to the Quartet's demands to recognize Israel, reports CBS News correspondent Robert Berger.
However, Palestinian analyst Bassam Eid says Hamas is learning "that the Palestinian economy is based on the support that we are receiving from the international community."
The so-called "Quartet" of peacemakers consists of the United States, European Union, United Nations and Russia.
Since Hamas cannot govern without international aid, there is a heated debate within the group about whether to soften its position toward Israel.
Israeli officials feared that international sanctions were leading to a humanitarian crisis in the West Bank and Gaza. So Israel and the Quartet face a dilemma: how to isolate Hamas while avoiding a crisis that could plunge the region into another round of violence and terror.
"Secretary of State Condoleezza Rice is clearly trying to work with the European and Russian political directors, within the U.N.-backed talks known as the Quartet, to find an interim solution working through non-government organizations," said CBS News foreign affairs analyst Pamela Falk. "U.S. negotiators came into the talks expecting to withhold all aid and left deciding that short-term humanitarian aid provided to the Palestinian people would move the discussion closer to a peace plan."
Palestinians warned the cutting off of fuel would deepen the humanitarian crisis brewing in the West Bank and Gaza Strip.
The head of the Palestinian petrol commission, Mujahid Salame, said he expected gasoline supplies to run out on Thursday. "If this happens, there will be a humanitarian crisis," he said.
He said Palestinian officials were in touch with American and European diplomats in hopes of pressuring Israel to reverse the move by Dor Energy.
Asaf Sharif, a top aide to Israeli Prime Minister Ehud Olmert, confirmed that Dor has decided to halt the shipments.
In the past, Israel paid the debt from tax revenues it collects for the Palestinian Authority. However, Sharif said Israel would not do so again.
Israel has frozen the $55 million in monthly tax transfers to the Palestinian Authority as part of its boycott of the new Hamas-led government. The tax money has been placed in escrow, and Israel used some of the money last month to pay the fuel debt, preventing a fuel crisis.
Hamas on Wednesday insisted Israel wasn't really interested in negotiating.
"Haim Ramon's assertion that Israel is ready for negotiations is no more than an attempt to trick the public," Palestinian government spokesman Ghazi Hamad said. "They don't want negotiations, and even if there were negotiations, they would not give us our rights."
He repeated that Hamas was prepared to grant a long-term truce if Israel would agree to retreat to the lines it held before the 1967 Mideast war — a condition Israel categorically rejects.
Olmert has said Israel prefers to negotiate, but would act on its own if Hamas didn't moderate. He never gave the Palestinians a deadline to head to the negotiating table, but has made it clear his patience was limited.
"If we wait a month, two months, three months, half a year and we don't see any change, then most likely we are going to move forward even without an agreement, without negotiations, in order to define the border lines which are acceptable for Israel," he told an international conference of mayors on Tuesday.