In a highly unusual step likely to come as a significant relief to U.S. officials, the Palestinian Authority has quietly paid an undisclosed amount to settle a lawsuit by the widow of an American killed in Israel in 2002.

The move resolving the longstanding court case appears to signal a more pragmatic approach by the Palestinians to such litigation. For years these court battles – between Americans and the Palestinian leadership — have roiled the U.S. government by pitting sympathetic U.S. terror victims against one of the negotiating partners in the Middle East peace process, complicating efforts by the Obama and Bush administrations to keep the Palestinians at the table.

A federal judge recently blasted the State Department for giving little guidance to the courts about how to tackle terror suits against the Palestinians. In a blunt December opinion, Judge Gladys Kessler called the executive branch’s vague official statements “mealy-mouthed” and “particularly unhelpful.”

The settlement came in a case brought in New York by Leslye Knox, the widow of Aharon Ellis, a professional singer who was among six people killed in 2002 when a gunman opened fire on a Bat Mitzvah party where he was performing in the Israeli city of Hadera. The Al Aqsa Brigades, a militant group affiliated with the Palestine Liberation Organization, claimed responsibility for the attack, which was allegedly carried out by a Palestinian Authority security officer.

The parties took a series of steps to keep the amount of the settlement secret, though court papers refer to “installment payments” to be made by the Palestinian Authority and the PLO. A judge handling the case imposed a $173 million default judgment in the suit in 2006 but conditionally vacated it in 2008. The two sides signed a settlement in October 2009 and filed legal papers last month asking that the suit be dropped because the payments required by the deal had been carried out.

“I think it’s very positive,” said Jim Kriendler, a lawyer who worked out one of the only other publicly known settlements of its kind: Libya’s agreement in 2008 to pay $1.5 billion to resolve suits over the bombing of Pan Am Flight 103 two decades earlier.

Kriendler said the settlements underscored the value of U.S. laws allowing lawsuits against perpetrators of terrorism overseas. “It’s not meant to be just a symbol or a hollow gesture, but a way of obtaining relief,” he said.

“The goal for bringing these lawsuits is to put terror sponsors out of business by making them pay. Hard cash is very important because hard cash is hard cash,” said Stephen Flatow, whose 20-year-old daughter Alisa was killed in a terrorist attack in Gaza in 1995. She helped inspire the so-called Flatow Amendment, which passed in 1996 and helped clarify the right to sue over acts of foreign terrorism.

However, Stephen Flatow complained that the secrecy surrounding the recent settlement undermines the law’s impact.

“How do we really know if a message is being sent if it’s all sealed up?” he asked. “People thinking of mounting a terror attack don’t know if they have a major payment to be concerned about…It kind of cheapens the action.”

Still, word that the cash-strapped Palestinian Authority voluntarily turned over funds to the family of a Jewish Israeli-American could be a political headache for Palestinian President Mahmoud Abbas and could expose his government to attacks from hardliners in Hamas, a rival group that controls the Gaza Strip. That worry could explain why the settlement has gone unpublicized since it was reached in October.

“If it’s a nominal amount, I’m sure they can manage it. If it’s substantial, it’s problematic,” said Hussein Ibish of the American Task Force on Palestine. “What the Palestinian Authority is doing right now is putting all its energy into building up state institutions, very much in line with the Obama Administration’s policies, including Israel’s policies…The idea of people trying to take money away from that is a pretty extraordinary one.”

A former State Department legal adviser, who worked on the issue during the Bush Administration, said the settlement reflects a decision by the Palestinian Authority leadership to clear away the suits wherever feasible.

“Prime Minister [Salam] Fayyad, who is also the Palestinian Finance Minister, has wanted to settle these cases for a long time because the plaintiffs’ efforts to attach Palestinian assets to satisfy the judgments threaten the financial stability of the Palestinian government. It’s financially prudent and politically courageous for him to do this,” the ex-official, John Bellinger, said. “It will also help bring some closure for the victims.”

A spokesman for the PLO Mission in Washington referred comment to its lawyers. One of those attorneys, Russell Hibey, declined to comment, as did the lawyer for Ellis’s family, David Strachman. Knox, a mother of six who recently worked as a teacher’s aide in Georgia and who publicly warned the State Department in 2008 against intervening in her case, would not be interviewed about the settlement, her lawyer said.

A State Department spokesman, Edgar Vasquez, declined to comment on the deal. “It’s a private matter between the parties,” Vasquez said.

Over the years, legal provisions authorizing the terror-related suits have had many enthusiastic backers on Capitol Hill including Sen. Arlen Specter (D-Penn.) and Frank Lautenberg (D-N.J.) They and other senators strongly lobbied the Bush Administration in 2008 against urging the courts to overturn the defaults entered against the Palestinians.

The Palestinian Authority moved to dismiss the Knox case soon after it was filed in 2003, but when that failed the defendants simply withdrew from the litigation. In 2006, Judge Victor Marrero entered a $193 million default judgment against the authority and the PLO. After Secretary of State Condoleezza Rice urged the Palestinian prime minister to respond to the various lawsuits in court or with the lawyers who filed them, the Palestinian Authority moved in 2007 to set aside the Knox judgment.

A source familiar with the Bush Administration’s deliberations on the matter said Rice wanted the government to formally urge judges to allow the Palestinians to reopen the cases. However, Attorney General Michael Mukasey, a former federal judge, said he was convinced no court would ever agree to do so, the source said. As a result, the Bush Administration took the politically easier route and sat on the legal sidelines. The Obama team adopted a similar stance.

As it turned out, Judge Victor Marrero eventually agreed to grant the PLO a new trial in the Knox case. However, because of the default, he insisted that the Palestinians put up a bond to cover the nearly $200 million judgment if they ended up losing at trial. The Palestinians offered $15 million but Fayyad told the court trying to come up with the larger sum “would cause further political unrest at a time when the moderate Caretaker Government is working to restore confidence that it is better able than Hamas to provide for basic needs of Palestinians living in the Occupied Palestinian Territory.”

Marrero later changed his order, instructing the Palestinians to post a $20 million bond and to submit an additional $5 million per month as the case went forward.

Experts said they were unaware of any other publicly-recorded terrorism-related settlement by the PLO or Palestinian Authority in the past decade. However, back in 1997, the PLO paid an undisclosed amount to settle a case brought by the family of a 69-year-old man killed and thrown overboard during the hijacking of the Achille Lauro cruise ship in 1985, Leon Klinghoffer.

A settlement may also have been reached in a case against the Palestinian Authority that was abruptly dropped in 2008 after a series of legal rulings against the defendants. The suit was brought in Washington, D.C. over the bombing of a bus carrying elementary school children out of an Israeli settlement in the Gaza Strip in 2000. Two people were killed and nine wounded. Strachman, who also represented the plaintiffs in that case, said he could not discuss the sudden “voluntary dismissal” of that suit after nearly eight years of litigation.

While the Palestinian Authority appears to be taking a more pragmatic approach to the suits it faces in the U.S., it is still fighting some of them vigorously. Earlier this week, the Palestinian Authority deposited $1 million with the federal court in Washington in order to proceed with a trial in a case brought by the family of Esh Gilmore, an American killed in a shooting attack in 2000 in Jersualem. The gunfire reportedly came from gunmen affiliated with two Palestinian groups, the Tanzim militia and Force 17. In the same ruling where she attacked the U.S. Government’s evasiveness, Kessler agreed in December to erase the Palestinians’ default in the case if they posted the million-dollar bond.