Palestinians headed toward a political showdown Sunday after Hamas rejected an ultimatum from moderate President Mahmoud Abbas to sign on to a plan implicitly recognizing Israel.

In a rare dose of good news, some Palestinian workers began drawing money from their banks, the first time they have been paid in three months.

CountryWatch: Israel

Abbas will order a referendum on a plan drawn up by top Palestinian prisoners in an Israeli jail calling for a Palestinian state in the West Bank, Gaza Strip and east Jerusalem alongside Israel, a Fatah official said Sunday. Abbas set a Tuesday deadline for Hamas agreement.

"If Hamas doesn't give a positive answer, Abbas will issue a presidential decree calling for a referendum," said Fatah official Azam al-Ahmad at a Sunday news conference in the West Bank city of Ramallah, where so-far unsuccessful talks have been taking place.

The Hamas takeover of the Palestinian government has led to a cutoff of funds by Israel, the U.S. and European Union, which list Hamas as a terror organization. The bankrupt government was unable to pay its 165,000 workers, who make up the largest sector in the Palestinian economy.

On Sunday the Palestine Bank in Gaza said it was opening its ATM machines, and the 40,000 lowest-paid workers began withdrawing money. The government said it would give them each $331, but the rest of the employees would have to wait.

Dozens lined up at ATMs in Gaza City. Bahar Habashi, 43, a father of seven who works as a doorman at a school, said the money would not come close to meeting the needs of his family. "I don't think this money will stay in my pocket more than an hour," he said, "but I am going to spare 50 shekels to buy candy and fresh fruit for my children."

The costly confrontation over recognition of Israel played out against the background of Israeli plans to set its own border unilaterally if peace negotiations fail. Israel refuses to talk to a Palestinian government headed by a movement that does not accept the Jewish state. Israeli Prime Minister Ehud Olmert traveled to Egypt Sunday to discuss the situation with Egyptian President Hosni Mubarak, often a mediator in Israeli-Palestinian disputes.

Mubarak is known to oppose unilateral Israeli steps, and U.S. Secretary of State Condoleezza Rice the U.S. prefers negotiations. She told a cable news network on Sunday that the "final status is really something that has to be mutually acceptable" to Israel and the Palestinians.

Palestinian Prime Minister Ismail Haniyeh of Hamas rejected Abbas' deadline and called the referendum proposal illegal, setting up a head-on political confrontation between Hamas and Fatah after days of tension on the streets that have set off some armed clashes.

"The local basic law and the advice which we got from experts in international law say that referendums are not permitted on the Palestinian land," Haniyeh told reporters.

At the center of the Hamas-Fatah standoff is an 18-point document worked out by representatives of the main Palestinian groups at a prison in southern Israel. A Hamas representative was among those signing the plan, calling for establishment of a Palestinian state in the West Bank, Gaza Strip and east Jerusalem — implying recognition of Israel across that border.

A poll released last week showed that nearly 90 percent of Palestinians favor the prisoners agreement. Al-Ahmad said Abbas would consider calling elections for president and parliament if Hamas did not abide by the results of a referendum.

Hamas, formed in 1987 at the beginning of a Palestinian uprising against Israeli occupation, holds that the Middle East must be entirely Islamic and Jews can not live in an independent state.

But that ideology was not at the center of the January election Hamas won in a landslide. Local issues, especially a decade of Fatah corruption and inept government, dominated — and now Hamas finds itself in power but ostracized by the West, facing bankruptcy and unable to carry out its platform of reforming the bloated government.

Under these new circumstances, some are looking for an exit. Moderates, who include West Bank leaders and jailed leaders, look at the new document as a way out of the deadlock and are even willing to give Abbas a chance to pursue peace talks.

But hard-liners, including much of the Gaza leadership as well as leaders living in exile in Lebanon and Syria, believe that accepting the plan would weaken the movement by abandoning its founding principles.