Japanese Prime Minister Junichiro Koizumi pledge nearly $30 million in aid to President Mahmoud Abbas on Thursday to help keep basic Palestinian services functioning.

Israel and Western countries cut aid to the Hamas-led Palestinian government after the Islamists refused to recognise the Jewish state and disarm. That has crippled some government services and left 165,000 state workers unpaid for four months.

But the international community has sought to back the moderate Abbas, who favours peace talks with Israel. Hamas is sworn to Israel's destruction.

Japanese officials said the money was earmarked for boosting medical services in Gaza and the occupied West Bank, as well as improving sanitation and sewerage.

"Japan's influence may not be as great as that of the United States and Europe, but we want to help Israelis and Palestinians live together and prosper," Koizumi told a news conference with Abbas in the West Bank city of Ramallah.

Koizumi came to the region hoping to promote peace between Israel and the Palestinians, but his visit has been overshadowed by spiralling Middle East violence.

Israel has intensified reprisals in Lebanon after Hizbollah fighters seized two Israeli soldiers and killed eight on Wednesday. Israel has also launched an offensive in Gaza to free a captured soldier and halt Palestinian rocket fire.

Japan has long felt it has a special role to play as a mediator between Israel and the Palestinian territories since it lacks the political baggage of the United States, enabling it to have warmer ties with Arab nations.

Koizumi, on a four-day visit to the Middle East, met Israeli Prime Minister Ehud Olmert on Wednesday and told him to consider the future of regional peace in its response to the Hizbollah attacks. He also said Abbas must be supported.

Japan is the second-largest aid donor to the Palestinian territories on a country basis after the United States, and the new aid will mainly go through international organizations, the way most of the $844 million Japan has given the territories since 1993 has been dispensed.

Koizumi heads to Jordan later on Thursday before flying to the Group of Eight summit of advanced nations in Russia.