By Francois Murphy and Arshad Mohammed

PARIS, Dec 17 (Reuters) - Dozens of international donors on Monday pledged $7.4 billion in aid to the Palestinians over the next three years in support of the Western-backed government of President Mahmoud Abbas, who is negotiating peace with Israel.

The Palestinian government had sought $5.6 billion over three years, funds designed to revive the moribund Palestinian economy and strengthen Abbas in a struggle with Hamas Islamists who seized control of the Gaza Strip in June.

"We see it as an important vote of confidence by the international community," Palestinian Prime Minister Salam Fayyad told a closing news conference hours after Abbas warned of dire consequences if the money hoped for did not materialise.

"Without the continuation of this aid and without the liquidity needed for the Palestinian budget, we will have a catastrophe in the Gaza Strip and in the West Bank," Abbas told the 87 countries and organisations present earlier on Monday.

U.S. Secretary of State Condoleezza Rice said the conference, the financial sequel to last month's Annapolis meeting that launched the first peace talks in seven years, was the Palestinian government's "last hope to avoid bankruptcy".

Of the total, $3.4 billion is to be given in 2008.

Fayyad said that by comparison the total received by the Palestinian Authority since the 1993 interim Oslo peace deal was around $8 billion or $9 billion.

The European Union executive offered more than $600 million of grant aid. The United States pledged $555 million for 2008 and Sarkozy said France would give $300 million over three years. A diplomat said Saudi Arabia pledged $500 million and Spain offered $360 million.

Abbas's challenges go well beyond finances. Hamas opposes peace talks and Israel antagonised Palestinians by announcing plans to expand a settlement near Jerusalem by around 300 homes.

"If we want to launch serious talks to end the conflict as we and the world have decided to do, then how can a key party pursue settlement activity and expansion?" he said.

WAR

Israeli Foreign Minister Tzipi Livni did not directly address his question but she reiterated Israel's intent to live up to the 2003 U.S.-backed "road map" peace plan that demands it freeze settlement activity.

"Despite the difficulties, we are ready to do so and are committed to meet our road map obligations, including in relation to settlement activity," Livni told the conference.

Several states and the World Bank told Israel it needed to scrap checkpoints that criss-cross the occupied West Bank if it wanted the aid to make a big difference for Palestinians, a point echoed by the Quartet of Middle East negotiators.

"It (the Quartet) stressed the importance of improved movement and access," the Quartet -- composed of Russia, the United States, the EU and United Nations -- said in a statement after a meeting on Monday.

It also "expressed concern" at Israel's settlement plan.

Livni struck a conciliatory tone in her speech but stood firm on checkpoints which Israel has refused to lift, citing security concerns. It has also tightened its military and economic cordon around Gaza.

Abbas and Israeli Prime Minister Ehud Olmert agreed at the Nov. 27 Annapolis talks to try to reach a deal on a Palestinian state by the end of 2008. Those talks formally resumed on Dec. 12 but have been complicated by the new settlement announcement.

Many analysts doubt the peace effort will go far because of divisions among the Palestinians and Olmert's weak position with a fragile governing coalition, part of which opposes the compromises necessary for a peace deal.

"The Paris conference was a meeting to declare war on Hamas and other resistance factions," Hamas official Sami Abu Zuhri said.

((For a FACTBOX on the aid pledged, Reuters 3000 Xtra users can double-click on [ID:nL17441998]))

(Additional reporting by Crispian Balmer, Kerstin Gehmlich and Nick Antonovics in Paris and Wafa Amr in Ramallah; Editing by Charles Dick)

AlertNet news is provided by