"The Commission will inform ministers on Monday of its decision temporarily to suspend aid to the Palestinian government," the senior British official said on Friday.
Later, the European Commission confirmed it had temporarily halted aid payments to the Hamas-led Palestinian government pending a decision by European Union foreign ministers next week on future assistance.
"For the time being, there are no payments to or through the Palestinian Authority," Commission spokeswoman Emma Udwin told a news briefing.
The EU's executive arm was adopting "a policy of maximum prudence" so as not to prejudge the ministers' discussion next Monday in Luxembourg, she said.
The Hamas-led government has not met the international community's requirements of recognizing Israel, renouncing violence and accepting past peace agreements, he said.
Meanwhile, Hamas urged the European Commission not to suspend aid to the new government led group, saying it would be a form of "collective punishment" on the Palestinian people.
"We urge Europe to adopt the language of dialogue without preconditions. Setting preconditions will not help the stability of the region," Mushir al-Masri, a Hamas lawmaker, told Reuters.
A spokeswoman for the Commission, the executive arm of the 25-nation European Union, was unable immediately to confirm or deny the suspension.
Diplomats said the suspension would cover all direct aid to the Palestinian government and payment of public employees' salaries with EU funds through a World Bank trust fund, but not humanitarian assistance through international and non-government organizations.
The British official said EU foreign ministers, at their monthly meeting in Luxembourg on Monday, would broadly endorse the Commission's approach, without explicitly referring to a suspension of aid in their statement on the Middle East.
A draft statement prepared for the meeting and seen by Reuters on Thursday made no mention of an immediate suspension of assistance to the Palestinian government, merely saying it would inevitably be affected.
Ministers will discuss what, if any, contacts the bloc could have with the government led by the Islamic militant movement, which advocates the violent destruction of Israel in its charter. Hamas is on the EU's list of outlawed terrorist organizations.
New Hamas Foreign Minister Mahmoud al-Zahar has twice this week appeared to float trial balloons by referring in a letter to U.N. Secretary-General Kofi Annan, later half-denied, and an interview with the London daily The Times to a "Two-state solution", Code for co-existence with Israel.
The British official said the EU would not slam the door in the face of the Palestinian government but would leave it open in the hope of change towards accepting the key peace principles.