The Hamas-led government faced a financial crisis on its first day in office Thursday, as Western nations threatened to cut off aid to the Palestinian Authority if the militant group does not soften its stance on Israel.

Hamas leaders said the aid cuts violate the Palestinians' democratic rights, but Secretary of State Condoleezza Rice declared: "The principle is very clear. We're not going to fund a Hamas-led government."

Hamas has rejected Western demands to renounce violence, recognize Israel and accept previous agreements between Israel and the Palestinians. The United States and European Union list Hamas as a terror group, as does Israel.

The Palestinian Authority gets a large part of its $1.9 billion annual budget from overseas sources, and may run into difficulties next week when March salaries are due to be paid to some 140,000 government employees.

Prime Minister Ismail Haniyeh said the aid cuts hurt the Palestinian people.

"We were hoping that some countries would respect the rules of the democratic game and that they would have had different positions and not act this way," he said.

And Foreign Minister Mahmoud Zahar hinted that any country that shuns Hamas will be considered "an enemy of the Palestinian people." He said Foreign Ministry employees would not be allowed to talk to them.

Rice said the United States was reviewing its Palestinian aid programs to see which ones it would freeze, emphasizing that the U.S. will not "provide funding to a Hamas-led government."

Rice said she expected to talk about Palestinian funding with France, Germany and Britain during her current trip. "We've been very much on the same page," she said.

The Quartet of Mideast mediators — the U.S., EU, Russia and the United Nations — warned the Hamas-led government Thursday to recognize Israel and seek peace talks if it wants to be guaranteed continued aid.

"The Quartet concurred that there inevitably will be an effect on direct assistance to that government and its ministries" if those conditions are not met, the mediators said in a statement.

Israel has already stopped transferring tens of millions of dollars a month in taxes it collects on behalf of the Palestinian Authority.

Immediately after the new Cabinet was sworn in Wednesday, Canada announced it was cutting off aid.

Hamas officials had hoped Arab and Islamic countries would fill the funding gap, but the Arab League summit ended earlier this week with states only reaffirming past pledges to provide the $55 million a month, a commitment they have rarely met.

Amid the threatened aid cuts, the new Hamas ministers assumed control of their offices Thursday, sometimes in unorthodox ceremonies.

Outgoing Prime Minister Ahmed Qureia was forced to turn his Ramallah office over to incoming Deputy Prime Minister Nasser Shaer, because Israel did not allow Haniyeh to travel there from Gaza.

Speaking in Gaza, Haniyeh said the seamless transfer was a testament to Palestinian democracy.

"This is proof that our people is a great civilized people, and the peaceful handover of power will now be a routine that our people will abide by," he said.

At the Foreign Ministry handover, the outgoing minister, Nasser Al Kidwa of Fatah, ended up in a debate with his successor about the need for the Hamas government to follow previous international agreements.

Zahar reiterated Hamas' stance that it would only abide by agreements it considered in the Palestinians' best interest. "Why do we have to preserve these agreements frozen or mummified and then worship them?" he asked.

Al Kidwa responded that international law and agreements were there to protect the Palestinians.

"International law is the line of defense for the Palestinian people, and the fact that one country does not abide by it does not belittle these agreements' importance, especially for the weak," he said.

Said Siyam took over the powerful Interior Ministry, which controls some of the Palestinian security forces, and insisted he would not arrest militants, one of Israel's conditions for peace talks with the Palestinians. He hinted, however, that he might to try to rein in the myriad armed groups by persuasion.

"We will not put our sons in prison, for political membership or resisting (Israeli) occupation, because occupation is the reason for the problem," he said.

U.S. envoys Elliot Abrams and David Welch met Israeli Foreign Minister Tzipi Livni on Thursday in talks that focused on the new Hamas government and the long-stalled "road map" peace plan, the Israeli Foreign Ministry said.