Obama Administration officials defended US aid to the Palestinian Authority on Tuesday, telling Congress the funds are critical for progress on Israeli-Palestinian peace process.

“Our assistance gives us leverage,” said Deputy Assistant Secretary of State Jacob Walles while testifying before a House Subcommittee on the Middle East and South Asia.

“There are practical benefits… improvement in security and helping develop institutions needed for a two-state solution,” he said

The hearing, held to reassess funding for the PA, comes days after both the House and Senate passed resolutions urging the White House to cut aid to the Palestinians if they followed through with plans to seek statehood from the United Nations in September. The Subcommittee also questioned the willingness of the PA to work on the peace process because of its recent reconciliation with Hamas.

Mr. Walles said the Administration requested $400 million for USAID projects and $150 million for security training programs in 2011.

Sources close to the issue told Al Arabiya that the Obama Administration is not yet seriously concerned about losing funding for the PA, and that the Congressional resolutions are aimed more at pressuring the Palestinians not to take their bid to the UN.

The PA is already facing financial crisis because of faltering foreign aid, which accounts for nearly one quarter of its $3.7 billion budget. Prime Minister Salam Fayyad announced in July that government employees would receive only half wages for the month, an austerity measure he pinned on nonpayment by Arab donors.

“I appeal to the donors – and our Arab brothers especially – to fulfill their financial commitment. The drop off has been in contributions from the region,” said Mr. Fayyed during a news conference on July 3.

Mr. Fayyed said donor countries have paid only $330 million of the $971 million committed this year; and among the Arab donors, only the United Arab Emirates, Oman and Algeria have paid what they pledged.

Part of the budget deficit is a result of the 2007 schism between the PA in the West Bank and Hamas in Gaza that left the West Bank $120 million short in lost revenues from Gaza. Hamas, which the US considers a terrorist organization, agreed in May to form a joint government with the West Bank’s ruling party Fatah, and hold elections within a year. Currently the two sides are unable to agree on a Cabinet, stalling the process.

But a unity government that includes Hamas could mean the US is legally bound to stop foreign aid to the Palestinians. US law prohibits giving any money to organizations on the American list of terrorist groups, which includes Hamas.

“Cutting funding will become a graver issue if the Palestinians make progress on forming a unity government. At that point, it’s an issue of US law,” American Task Force on Palestine Founder and President Ziad Asali told Al Arabiya on Tuesday.

Some members of the Subcommittee acknowledged Fatah’s strategic reasons for reconciling with Hamas, while warning that it wasn’t the only issue that would affect the flow of American dollars.

“US aid is intended to support the peace process,” said Congressman Gary Ackerman at the hearing. “If the PA unwisely abandons that for the UN, then this decision will come with a price tag of hundreds of millions of dollars.”