Abbas's prime minister, Salam Fayyad, could not pay salaries on time this month after his government diverted funds to compensate Palestinians in the Gaza Strip whose homes were lost in last month's Israeli war against the enclave's Hamas rulers.

Abbas's social affairs minister, Mahmoud al-Habbash, told Reuters that employees' salaries would be paid on Tuesday and that the government would pay back the bank loans with cash from international donors.

"Salaries will be paid tomorrow. We received financial assistance from local banks and we hope that financial aid from donors will be transferred soon to pay back the loans," al-Habbash said.

Government workers had declared a strike, citing Fayyad's inability to pay wages, at the beginning of the month.

Fayyad, who runs a government largely dependent on foreign aid, wants to take the lead in costly reconstruction efforts in the Gaza Strip to sideline Hamas.

The Islamist group, which won a 2006 Palestinian election and seized control of the Gaza Strip from Abbas's secular Fatah forces 18 months later, has also started making partial payments to Palestinians who lost their homes in the war.

Some 1,300 Palestinians were killed in Israel's three-week bombardment of the Gaza Strip. About 5,000 homes were destroyed, along with many roads, bridges and government buildings. Reconstruction is estimated to cost at least $2 billion.

Fayyad got the money to begin paying Palestinians in the Gaza Strip earlier this month when Israeli Prime Minister Ehud Olmert approved the transfer of 175 million shekels ($43 million) from the West Bank to the Gaza Strip.

Washington wants credit for reconstruction to accrue to Abbas's government rather than Hamas's administration in the Gaza Strip. Hamas receives financial support from Iran.