(adds Fayyad interview, parliamentarians' comments)

By Paul Taylor

BRUSSELS, April 11 (Reuters) - Palestinian Finance Minister Salam Fayyad told the European Union on Wednesday a new national unity government needed more than $1.3 billion in international aid this year to avert a "devastating" humanitarian crisis.

He won a cautious endorsement from EU External Relations Commissioner Benita Ferrero-Waldner, who promised technical assistance to enable his ministry to receive aid once the Palestinian Authority meets key political conditions.

"We are looking for external support to bridge a gap of nearly 1 billion euros ($1.34 billion) for 2007," Fayyad told a joint news conference, stressing his government's commitment to respect all peace accords with Israel.

Asked what would happen if aid was not forthcoming, he said: "The consequences are far too grave, quite frankly."

Fayyad, a respected independent technocrat, was on the first visit to Brussels by a member of the new government after the EU boycotted the former Hamas-led administration due to the Islamic movement's refusal to recognise Israel or renounce violence.

Ferrero-Waldner praised his personal commitment to peace but made clear the EU's engagement would be selective, gradual and dependent on the government's words and actions.

"I've made very clear that possible financial engagement would not mean resuming direct financial assistance overnight," she said, pledging that a temporary aid system created to bypass the Hamas-led government would remain for as long as necessary.

The Finance Ministry will take time to meet international standards for absorbing aid, and "the EU will also need time to come to a decision then on this political issue", she said.

SELECTIVE ENGAGEMENT

The EU, the Palestinians' biggest donor, increased aid from 500 million to 700 million euros last year, paying subsistence allowances to 150,000 families and keeping essential services going through the Temporary International Mechanism.

Fayyad told Reuters he had inherited public finances in disrepair and the EU should keep that lifeline going and develop it until his ministry was able to receive foreign transfers, which would require the lifting of U.S. banking restrictions.

Asked how long it would take before the ministry was ready to receive direct aid, he said: "Insofar as setting up a system or re-establishing a central treasury is concerned, I think we are there now, but for the restrictions which make it not possible for us to receive international assistance."

The Quartet of Middle East peace brokers -- the United States, Russia, the United Nations and the European Union -- suspended direct aid to the Palestinian Authority after Hamas formed a government last year.

While Fayyad presented the Palestinian Authority as a single team committed to the same platform, Ferrero-Waldner made clear the EU would work with non-Hamas members such Foreign Minister Ziad Abu Amr and Information Minister Mustafa Barghouthi.

Fayyad said the Palestinian Authority was operating on a quarter of the funds it needs to provide essential services.

Even once a properly functioning finance ministry was restored, economic recovery would require the lifting of Israeli restrictions on trade, movement and access, tightened as part of a security crackdown on the Hamas government, he said.

He met the EU's Middle East peace envoy, Marc Otte, and European Parliament leaders and was to travel on to Norway, which brokered a landmark 1993 Israeli-Palestinian peace deal.

The parliamentary leaders said they respected Fayyad's integrity and told him it was vital the Palestinians build transparent financial management and avoid past errors.

"We want to be able to see, prove, check, where the money went. It's a special problem of the Palestinian Authority after the recent years, but it's also a general problem of the aid of the European Union," budget committee chairman Herbert Boesch told Reuters. (additional reporting by Ingrid Melander)

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