Efforts to restrict U.S. aid from going to the Palestinian government until Hamas disarms and neutralizes terrorist elements within its ranks hit a snag this summer after U.S. officials clashed over just who should be holding the purse strings.

The dispute is not over whether a terrorist-led government should be given U.S. assistance. Rather, in one of the rare disagreements between the Republican-controlled Congress and the Bush administration, State Department officials expressed concern that the House- and Senate-passed bills would limit the executive branch's ability to use financial incentives or sanctions as a tool to persuade governments to alter their behavior.

The U.S. Palestinian Anti-Terrorism Act of 2006, introduced by Rep. Ileana Ros-Lehtinen, R-Fla., and passed 361-37 in May, prevents financial assistance to the Palestinian Authority, currently led by Hamas, a U.S.-designated terrorist organization, unless the U.S. president has certified that no terror groups or individuals serve in a senior policy-making position in the Palestinian Authority.

It also limits aid until the Palestinian Authority acknowledges Israel's right to exist and has shown it is purging its security services of individuals with terror ties, halting anti-Israel incitement and ensuring democracy and financial transparency.

The bill does allow exceptions for "basic human health needs," protection of elections commissioners without terror ties and the personal security detail for the president of the Palestinian Authority.

"This is a tremendously important piece of legislation designed to prevent U.S. funds from being manipulated for the benefit of Hamas and other Palestinian terrorist groups which spread violence, threaten the Israeli-Palestinian peace process and prevent stabilization of the region," Ros-Lehtinen said in a statement. "It is imperative that this bill is passed quickly in its strongest and most effective form possible."

After the bill passed the House, however, the State Department issued its own statement saying congressional action is redundant on top of President Bush's decision to suspend aid and would restrict the president's ability to negotiate with non-Hamas actors within that government.

"The bill is unnecessary as the executive branch already has ample authority to impose all its restrictions and it constrains the executive's flexibility to use sanctions," the statement reads.

State Department officials have said they do not see Hamas as a "partner for peace" and will not allow a dime of money to fund its activities. In April, the White House announced that the Bush administration is putting a hold on $400 million in funds to the Palestinians, three months after Hamas was elected to be the majority party in the Palestinian Legislative Council, the Palestinian parliament.

Officials note that $245 million is continuing to flow from the United States to the Palestinian territories, but only through existing programs at the United Nations, the U.S. Agency for International Development and sanctioned non-governmental agencies offering humanitarian aid, education and democratic alternatives to Hamas.

U.S. officials said no money goes directly to the Palestinian Authority, even though Palestinian President Mahmoud Abbas, leader of the Fatah Party, is not part of Hamas. Fatah's military wing, the Al-Aqsa Martyrs Brigade, is also deemed a terror group, but Abbas has said he is willing to negotiate with Israel according to the two-state solution outlined in the roadmap to peace developed by the United States, United Nations, European Union and Russia.

Sens. Mitch McConnell, R-Ky., and Joe Biden, D-Del., who sponsored the Senate version of the bill, said Congress needs to oversee stricter sanctions in order to pressure Hamas to join "the community of peaceful nations and step away from the ranks of terrorism."

"Both Senator Biden and I appreciate the need not to punish the Palestinian people for actions its government may take. Our concern is with terrorism and with terrorists and in providing Hamas the proper incentives to embrace peace and to abandon the pro-terror stance they have taken up until now," McConnell said following unanimous Senate passage of the bill in June.

Despite strong support for the bills in the House and Senate, the chambers were unable to reach a compromise before the August recess. The House version is more restrictive in that it holds back U.S. funds from the United Nations programs if they are deemed duplicative, violate the requirements set forth in the bill or "fail to ensure a balanced U.N. approach to Israeli-Palestinian issues."

The House bill also does not provide exceptions for democracy-building, education and other humanitarian assistance now allowed by the administration. It demands additional auditing of funds and greater congressional oversight to certify whether or not the sanctions can be lifted, and it restricts travel and movement of all Palestinian Authority representatives to the United States, even those not tied to Hamas, though an exception can be made by the president.

The Senate bill does not contain these restrictions. An aide to Senate Foreign Relations Committee Chairman Sen. Dick Lugar, R-Ind., denied that the senator had been approached by the State Department to reject the more restrictive House provisions.

No pressure was put on the chairman to keep it from moving forward, and as a co-sponsor of the Senate bill, Lugar was "working towards passage," said spokesman Andy Fisher.

Fisher also said some compromises were being made in the Senate language to make it more palatable to the House side, though he would not confirm exactly what those changes were and whether they would pass muster in the Senate.

Still, the lack of quick action left some lawmakers and outside interests discouraged. They say without congressional control, U.S. taxpayers can't be sure their money is not going to fund terrorists in the Middle East.

"The American people are the most generous people in the world and believe in humanitarian solutions but they are chagrined when their money and food never gets to the people they have sent it for," said Sam Slom, a Republican state senator in Hawaii who is part of a small but vocal Jewish community there. "Congress should hold the purse strings."

Slom said he agrees with lawmakers like Ros-Lehtinin, who say no mechanisms are now in place to ensure that American aid would not somehow get into the hands of Hamas. He added that he and others are angry with Rep. Neil Abercrombie, D-Hawaii, for voting against the House bill and a resolution passed in July reaffirming congressional support for Israel and condemning Hamas, Hezbollah and its state sponsors for igniting a new armed conflict in the region.

"Unfortunately, their position does not reflect the reality of the political times," Slom said.

Critics say the congressional sanctions go well beyond the measures put into place by the administration, would have a counterproductive effect on democratic efforts in the Palestinian territories and put innocent lives at risk.

"Isolating the Palestinian people and the NGOs working on the ground for peace will weaken Israel's security, damage our interests and punish the wrong people," said Rep. Jim Kolbe, R-Ariz., who voted against the bill.

"For the last few years, the U.S. has been fairly scrupulous about making sure no money gets to terrorist groups like Hamas," added M.J. Rosenberg, head of the liberal Israel Policy Center in Washington, D.C., which agrees with the State Department's approach. "The U.S. is so strict on this Hamas stuff."

The impasse in the United States is occurring as Israeli Defense Forces continue to fight Hamas terrorists in the Gaza Strip. The violence began in July after two Israeli solders were killed and one was kidnapped by Hamas at a border checkpoint. The kidnapped soldier, Cpl. Gilad Shalit, has yet to be freed by his captors.

On Tuesday, Israeli forces made a new incursion into the strip with tanks and unmanned planes, reportedly targeting terrorist hideouts. Some 40 Palestinian government officials and legislative members have since been imprisoned by the Israelis.

Israel supporters say they are looking forward to seeing a final bill passed when Congress returns from its break in September.

"Congress is clearly on record in overwhelming numbers [for] the legislation and the principles behind it," said Josh Block, spokesman for the American-Israel Public Affairs Committee, the most influential pro-Israel lobby in the United States.

Rosenberg, however, said he doesn't think the Senate and House will be able to come to a compromise. He called the House bill a heavy-handed, "2x4-over-the-head approach" that appeared to have more of a political agenda than anything else.

Rosenberg said he believes the legislation would make little difference since steps have been taken in the administration to stop funding to Hamas, including effective monitoring and auditing of all humanitarian contributions to the region.

But those steps don't satisfy everyone.

"I want it spelled out what they are actually doing," Slom said. "Saying they are already doing this doesn't give me any reason to sleep better at night."

In addition to the Palestinians, State Department officials said little discussion has occurred on whether the same debate will be applied to the crisis in Lebanon, where Hezbollah — another U.S.-designated terrorist organization with members in the Lebanese parliament — and Israel are maintaining a tenuous cease-fire following 34 days of combat.

The United States has already handed out at least $27 million of $230 million in humanitarian assistance set aside to the Lebanese people, 915,000 of whom were displaced by the violence since the outbreak of hostilities July 12, according to the Lebanese government.

Observers said it is too soon to tell if U.S. officials will seek to sanction Lebanon over Hezbollah's participation, but added that unlike Hamas, Hezbollah is a minority representative in parliament and has control over only one government ministry there.