By David Brunnstrom

BRUSSELS, March 22 (Reuters) - The Palestinian finance minister is expected in Brussels within weeks to discuss ways to ease a ban on direct aid following the European Union's decision to engage with moderate members of a new unity government.

The government's programme still falls short of conditions for lifting the aid ban imposed after the militant Hamas group won power last year and refused to recognise Israel, EU officials said on Thursday.

The European Union, the largest aid donor to the Palestinians, has made resumption of direct aid conditional on a Palestinian administration recognising Israel's existence, renouncing violence and respecting past peace agreements.

The secular Fatah faction and Islamist Hamas formed a unity cabinet on Saturday aimed at ending factional strife and the aid embargo.

"The programme does not go as far as we would like," said Cristina Gallach, a spokeswoman for EU foreign policy chief Javier Solana. "Let's see what they do with the programme.

"The EU's policy is one of proactive wait-and-see. We will continue to engage with the president and those ministers that we have been able to work with in the past," she said, referring to President Mahmoud Abbas and other non-Hamas moderates.

Finance Minister Salam Fayyad, a former World Bank and IMF official close to the moderate Fatah faction and the West, is expected to travel broadly to seek ways to end Western sanctions.

BRUSSELS TRIP

EU External Relations Commissioner Benita Ferrero-Waldner telephoned Fayyad on Wednesday to congratulate him on his appointment to the unity government.

He suggested visiting Brussels and this was likely in coming weeks, Ferrero-Waldner's spokeswoman Emma Udwin said.

"Minister Fayyad some weeks ago informed us that even under the best of political circumstances it would be some months before his ministry is ready to receive donor cash," Udwin said.

The unity deal has eased a Western diplomatic embargo of the Palestinian government. The United States, the European Union and the United Nations have sent diplomats to meet non-Hamas ministers, despite Israeli appeals to shun the government.

Despite the embargo on direct aid to the administration, EU assistance to the Palestinians increased last year to 700 million euros ($936.3 million) from around 500 million.

Of this 200 million euros went through a temporary aid mechanism set up last year to channel funds to keep essential state services running.

On Wednesday the quartet of Middle East mediators -- the European Union, the United States, Russia and the United Nations -- agreed to extend this mechanism for another three months.

The aid embargo is expected to be discussed at a meeting of EU foreign ministers in Germany on March 30-31. France is among EU states pushing for more engagement with the new government. (Addtional reporting by Mark John)

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