Israeli officials say the Obama administration has asked Congress to change a U.S. law to allow such indirect funding for Hamas, even though the group is on the State Department's list of terrorist organizations.
According to a report in the Los Angeles Times, the Obama administration requested the changes this month as part of an $83-billion emergency spending bill that also includes funding for the wars in Iraq and Afghanistan.
The bill would provide $840 million for the Palestinian Authority and for the reconstruction of Gaza following the Israeli assault on the territory in January.
Gaza is ruled by Hamas, while the more moderate Palestinian Authority, led by U.S.-backed President Mahmoud Abbas of the Fatah party, controls the West Bank. The rival factions have been holding reconciliation talks in Cairo with the goal of forming a national unity government.
"Every step that strengthens Hamas only distances peace," an unnamed Israeli political official in Jerusalem told the nation's Haaretz newspaper. "In the event that the report is true, it is painful and worrying."
Israel believes Hamas should be boycotted until it meets requirements set down by the Quartet of world powers involved in Mideast peace negotiations — the U.S., European Union, United Nations and Russia.
The Quartet has said Hamas must renounce violence and recognize the Jewish state. Officials in Jerusalem say Hamas is a terrorist group that should be isolated, and any U.S. funding for the group would weaken Palestinian moderates and harm the peace process.