WASHINGTON, March 19 (Xinhua) -- The United States is facing dilemma after Hamas and the U.S. main Palestinian allies formed a coalition government on Saturday, the Wall Street Journal said on Monday.

    The new Palestinian government, formed under an agreement between the Islamist group Hamas and its secular rival Fatah, creates a quandary for Washington at a crucial moment.

    Israel, the U.S.'s closest ally in the Middle East, has rejected the new Palestinian government and is publicly pressing Washington to continue leading the global boycott of a Palestinian government involved with Hamas, the newspaper said in a by-line story.

    The United States and Israel consider Hamas a terrorist group, as does the European Union. But key Arab allies of the United States, who are increasingly important to President George W. Bush's broader Middle East strategy, have embraced the new government.

    Arab countries said Hamas had made concessions toward Israel. Europeans have also expressed optimism over the agreement.

    The new developments mean U.S. Secretary of State Condoleezza Rice, who returns to the Middle East this weekend, "must navigate some difficult challenges," the article said.

    "How the Bush administration proceeds could affect not only prospects for renewed peace talks between Israelis and Palestinians, but also Washington's efforts elsewhere in the region."

    Washington has been using the promise of progress toward a permanent Palestinian state to help bring the Arab world together for two related efforts: an attempt to stabilize Iraq and to work in common cause to contain Iran's influence in the region.

    Rice's scheduled Mideast trip will mark her fourth visit in less than four months.

    Saudi Arabia, one of major U.S. allies in the Middle East, is leading the diplomatic coalition of Arab states involved in Washington's efforts to contain Iran and stabilize Iraq. It also led efforts to forge the agreement that brought about the new Palestinian government.

    If Rice slams the door too hard on the new Palestinian government during her Mideast trip, she could jeopardize Saudi diplomatic efforts slated for an Arab summit beginning on March 28in the Saudi capital of Riyadh, the article said.

    "The Saudis are putting not only Arab countries into the basket behind their initiatives, but the entire Muslim world," Mahdi Abdul Hadi, head of the Palestinian Academic Society for the Study of International Affairs, was quoted as saying.

    Abdul Hadi said he thinks the importance to Washington of these broader moves will eventually force the U.S. to adopt a more pragmatic attitude toward the Palestinian government.

    "They (Americans) will not embrace it for sure; this will never be, but maybe they will be practical in it."

    On Saturday, Hamas, which has dominated the Palestinian Authority government for a year, formed a new ruling coalition with rival Palestinian faction Fatah.

    In response, Stephen Hadley, U.S. President George W. Bush's national security adviser, said on Sunday that Washington will not deal with the new Palestinian government unless it agrees to give up violence and fully recognize Israel.

    "This (Palestinian) government needs to renounce terror and violence," Hadley told CNN. "It needs to acknowledge the right of Israel to exist, and it needs to recognize the various agreements that have entered in between the PLO (Palestine Liberation Organization) and Israel."

    "We will not deal with this government until it accepts those principles," he said. "We'll be watching obviously for the words and deeds of this government."