Israel maintains Hamas is a terrorist group, and has angrily refused to work with a Palestinian unity government that would include Hamas members.
On Monday, Palestinian President Mahmoud Abbas swore in a new government that is made up of technocrats backed by Hamas and the rival Fatah political faction. Hours later, Secretary of State John Kerry called Israeli Prime Minister Benjamin Netanyahu to relay U.S. willingness to work with the new leaders.
Separately, in an Associated Press interview, the EU's top envoy to the U.S. said Europe was prepared to work with a government backed by Hamas.
"We never said we would not," Ambassador Joao Vale de Almeida said. "It's a question of substance rather than the question of composition of the government."
Still, Vale de Almeida said Europe was insisting that the new Palestinian government recognize the right for Israel to exist and the need for a negotiated peace agreement with the Jewish state. Israel broke off nearly nine months of peace negotiations in April after Abbas endorsed the tentative unity government to end seven years of separate leadership in the west Bank and Gaza Strip.
"We are in favor of Palestinian recognition," Vale de Almeida said. "We think it's an important element in the process to bringing a long-term solution - but not at any price. It has to be based on respect for a certain number of values."
Psaki said the U.S. was prepared to continue sending U.S. foreign assistance to the Palestinian Authority and what she described as the "interim technocratic government."
The decision would almost certainly draw criticism from Israel and its supporters in Congress and elsewhere.
Rep. Kay Granger, a Republican who chairs a House Appropriations subcommittee on U.S. foreign operations, said Palestinian aid was now "off the table." The panel's top Democrat, Rep. Nita Lowey, was almost as strong, saying the deal puts funding "in jeopardy."
Sen. Patrick Leahy, a Democrat, the Senate's top appropriator for overseas assistance, didn't immediately comment.