Secretary of State Condoleezza Rice announced Monday that the United States is lifting its economic sanctions on the Palestinian Authority now that terror group Hamas has been booted from the government.

Rice said she called interim Palestinian Prime Minister Salam Fayyad to inform him of the decision

"I told him the United States would resume full assistance to the Palestinian government and normal government to government contacts," Rice told reporters at the State Department.

The decision to release millions of dollars in aid follows the lead of the European Union. Both the United States and EU froze funding to the region after the January 2006 election gave the terrorist group Hamas, which has not renounced violence and calls for the destruction of Israel, a leading power-sharing agreement in the Palestinian government.

"This will enable the American people and American financial institutions to resume normal economic and commercial ties with the Palestinian government," Rice said, noting that Congress must restructure assistance so that about $86 million will be directed to building a responsible Palestinian security force.

In addition, the United States will contribute $40 million to the United Nations to help Palestinians, particularly those in the cut-off, Hamas-controlled area of Gaza.

Rice said that the release of funding follows an apparent commitment from the politically-weak president, Mahmoud Abbas, to continue down a path to a two-state solution of Israel and Palestine. The PA must hold elections in two months to create a more permanent Cabinet.

"This is someone who has a reputation for integrity and can be relied on with appropriate controls and appropriate authority," Rice said of the Palestinian president, whose Fatah Party's military wing last week engaged in a violent struggle against Hamas militants in Gaza.

The two territories of Gaza and the West Bank, equal in population if not in size, are now separated not only geographically but politically, with Hamas controlling the coastal strip and Abbas concentrating his power in the more centrally located areas of Judea and Samarra.

Rice said while the United States is dealing only with the government formed by Abbas, the 1.4 million Palestinians in Gaza will not be neglected.

"Just as there is one Palestinian people, we are not going to countenance that somehow that Palestinians are divisible. So we are going to support President Abbas and what he wants to do. We are going to support Prime Minister Fayyad but we are not going to abandon Palestinians living in Gaza," she said.

Rice's comments followed a morning phone call between Abbas and President Bush, who exchanged ideas on how to improve security in Gaza and the West Bank after the coalition government melted down into rival fighting last week.

In the 15-minute phone call, Bush and the Abbas discussed U.S. financial aid in general terms and the resumption of peace talks with Israel.

Abbas told Bush about the swearing-in of an emergency Cabinet on Sunday, which he did after outlawing Hamas and dissolving the previous administration. The new Cabinet is now led by the Western-backed economist Fayyad.

In the call, Bush also previewed his meeting on Tuesday with Israeli Prime Minister Ehud Olmert, in which the two are expected to discuss how to proceed following a violent conflict between the rival Palestinian factions, White House press secretary Tony Snow said.

"What's important is, you have to have a partner who is committed to peace, and we believe that President Abbas is," Snow said. "And therefore we are committed to working with this new emergency government."

With Hamas now concentrated in Gaza, the Western nations must come up with a plan on how to deal with the Palestinians increasingly isolated there.

"As far as Gaza is concerned, we have to continue helping the Palestinian people. We cannot let down at this moment the Palestinian people who live in Gaza. We have said that to the new prime minister, and the new prime minister is committed also to be the prime minister of all the territories and whenever he does some help, he will do it in both places, the West Bank and Gaza," said EU foreign policy chief Javier Solana.

U.S. officials say they expect Israel will also announce the release of customs duties it had collected from the Palestinian territories, up to $50 million a month that was frozen when the coalition government was formed. Olmert arrived in Washington, D.C., from New York on Monday for talks Rice and National Security Adviser Stephen Hadley, before meeting with Bush on Tuesday.

With Fatah in charge in the West Bank, some in the United States and in Europe are advocating a policy dubbed "West Bank first" in which the West Bank would stand as an example of what a future Palestinian state could be. Critics on the other side say that leaves Palestinians living in the Gaza Strip without assistance. Europeans oppose this idea, and still others worry it would leave the Gaza Strip open to funding and influence from Iran and Syria.

Five years ago, Bush called for a separate, independent Palestine alongside Israel. He was the first U.S. president to back that notion so fully and publicly. But his administration has taken heavy criticism for letting the peace process drift while conditions worsened for the impoverished Palestinians.

In New York on Sunday, Olmert said his country would be a "genuine partner" of a new Palestinian government committed to peace.

FOX News' Wendell Goler and The Associated Press contributed to this report.