By Wafa Amr

RAMALLAH, West Bank, Oct 27 (Reuters) - President Mahmoud Abbas has tightened up Palestinian money-laundering laws aimed at denying cash to rival Hamas Islamists and boosting foreign confidence in Palestinian banks, officials said on Saturday.

Abbas broke with Hamas after Hamas seized the Gaza Strip in June and his Palestinian Authority has fallen in line with Israeli and Western efforts to isolate the group financially.

Palestinian banks formally shun Hamas. But it has found alternative funding in the form of foreign donations handled by Islamic charities or local businesses such as money-changers, Palestinian and Israeli officials say.

The new regulations issued by Abbas penalise such dealings with a 3- to 15-year jail term and a fine of up to $145,000.

Abbas also wants to reassure Israel and the United States that Palestinian banks conform to international limits on doing business with groups designated "terrorist" in the West.

"This law would assure international banks they can do business with Palestinian banks because they are complying with international standards," Jihad Wazir, deputy governor of the Palestine Monetary Authority, told Reuters.

"Compliance officers in the banks will see to it that there are no violations."

Hamas, which came to power in 2006 legislative elections and has accused Abbas of a coup, cried foul.

"This is an illegal law because it wasn't approved by the Palestinian Legislative Council," Hamas official Sami Abu Zuhri said, referring to parliament, which has been rendered largely inert by the schism with Abbas.

"In any case, this law may have little impact and will not achieve its objective of putting restrictions on the entry of funds to the Palestinian people and the resistance factions," Abu Zuhri said.

Hamas is also believed to smuggle large amounts of cash into Gaza from neighbouring Egypt.

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