Israel ruled out contacts with a Palestinian government led by Hamas unless the Islamic group renounces violence and threatened Sunday to "liquidate" militants if they resume attacking Israelis.

Acting Prime Minister Ehud Olmert said Israel will stop the monthly transfer of tens of millions of dollars in tax rebates and other funds to the Palestinian Authority if a Hamas government is installed.

With the latest comments, Israel showed no signs of backing down from the hard line it has taken since Hamas won a surprising landslide victory in Palestinian legislative elections last week.

Hamas, which opposes the existence of Israel and has killed hundreds of Israelis in suicide bomb attacks, is expected to lead the next Palestinian government, hurting the chances for a peace deal.

Also Sunday, about 7,000 Israeli security forces, anticipating violent resistance, were training to dismantle two small West Bank settlement outposts later this week, police said. Resistance is expected to be fierce in Amona and among Israeli squatters who took over an abandoned market in the Palestinian city of Hebron.

Israel's Supreme Court rejected a request from Jewish settlers to delay the order, clearing the way for the operation to proceed. It will mark Israel's first evacuation of Jewish settlers since withdrawing from the Gaza Strip and part of the West Bank in August.

Olmert, addressing the weekly meeting of his Cabinet, said he has been in touch with leaders around the world in recent days and received support for the tough Israeli stance against Hamas.

"We clarified that without a clear abandonment of the path of terror, a recognition of Israel's right to exist in security and peace ... Israel won't have any contact with the Palestinians," Olmert said. "These principles are accepted by the international community. On this issue, I don't intend to make any compromises."

Hamas refuses to disarm or recognize Israel, though it has hinted that it could reach a long-term truce or other accommodation with the Jewish state.

Visiting German Chancellor Angela Merkel told a news conference Germany will only deal with Hamas if it recognizes Israel and renounces violence. Merkel was meeting Israeli and Palestinian officials but said she would not meet Hamas representatives.

Israeli officials said the ban on contacts did not extend to Palestinian leader Mahmoud Abbas, who accepts the Israeli conditions and is eager to resume peace talks. Abbas was elected to a four-year term last year and remains in power.

However, Olmert said Israel will not hand over value added tax and customs funds it collects on behalf of the Palestinians to a Hamas-led government.

Israel has "no intention" of sending funds to terror groups, Olmert told a joint news conference with Merkel.

Every month, Israel transfers an average of $54 million collected at ports and border crossings. In the past, Israel has held up the transfers during times of tension. Such a delay now would cripple the cash-strapped Palestinian government.

During the Cabinet meeting, Defense Minister Shaul Mofaz said Hamas "is portraying policies of responsibility" and even has tried to restrain suicide attacks by the radical Islamic Jihad group.

But earlier, Mofaz said Israel is prepared to kill Hamas militants if the group resumes its attacks.

"Those who head terror organizations and continue to engage in terror against the state of Israel will be liquidated," told Channel 2 TV on Saturday night.

During five years of fighting with the Palestinians, Israel killed dozens of Hamas militants in airstrikes, including the group's founder and spiritual leader, Ahmed Yassin.

Since a cease-fire declaration last February, Hamas has not claimed involvement in a suicide attack and Israel has not killed any of the group's leaders.

Abbas, whose Fatah Party was routed in last week's election, has asked Hamas to form a new government and now must find a way to work with the Islamists. The arrangement could potentially put Hamas in charge of some, if not all, of the 58,000 Palestinian security forces.

But Fatah leaders say they will not submit to Hamas' authority over the Fatah-dominated security forces. The way Hamas deals with the security forces will prove key to how smoothly the power transfer goes.

"This is one of the biggest challenges facing Hamas," said Moheeb al-Nawaty, an expert on Islamic groups. "The security forces, their members and leaders, will not give in easily."

Hamas will face a struggle to overcome that internal challenge, plus threats of international isolation and a cutoff in foreign funding, to make good on its promises to clean up the government.

International donors, who have annually made up a huge shortfall in the perpetually strapped Palestinian Authority, are balking at funding a Hamas regime.

Abbas in the past has called on Hamas to disarm, as required in the U.S.-backed "road map" peace plan, but never took action against the group.

Hamas' supreme leader, Khaled Mashaal, said Saturday the group would not disarm but suggested it could fold the thousands of fighters in its armed wing into a Palestinian security force.