UNITED NATIONS — As America joined European, Russian, and U.N. officials at Turtle Bay yesterday in welcoming the possible participation of Hamas in a future Palestinian Arab unity government, the terrorist group’s leader, Ismail Haniyah, said he will not recognize Israel.

The split screen-like drama occurred as American policy-makers faced growing criticism in Europe, at the United Nations, and among Arab leaders, who said the Bush administration’s lack of diplomatic activity has led to an economic downturn in the Palestinian Arab territories.

European officials have argued that a “peace process” and financial aid must be renewed, even if Palestinian Arab leaders do not explicitly recognize Israel or clearly renounce terrorism and accept prior signed agreements, three conditions set by the Quartet — America, the European Union, the United Nations, and Russia — last January as “benchmarks” for renewed contacts with the Hamas-led government.

At the same time, the Israeli foreign minister, Tzipi Livni, used her U.N. General Assembly speech yesterday to add to those conditions, calling on the Palestinian Arabs to drop their demand to flood the Jewish state with millions of Arabs currently defined as “Palestinian refugees.”

Ms. Livni paid homage to Prime Minister Sharon, who last year told the assembly that Palestinian Arabs “are entitled to freedom and to a national, sovereign existence in a state of their own,” adding that just as Jewish refugees have found a solution in Israel, Palestinian Arabs should find a solution in their own future state.

“Instead of giving false hope,” she said, “it is time to end the exploitation of the refugee issue and begin to resolve it on the basis of the vision of two states, two homelands.”

Several generations after the 1948 founding of Israel, the United Nations still defines as refugees any Arabs who left what was then called British-mandated Palestine, as well as their descendants.

President Bush, who originated the vision of two states, met yesterday with the Palestinian Arab leader, Mahmoud Abbas, in an effort to boost the political standing of the Fatah leader. Nevertheless, after their Waldorf-Astoria meeting, neither man referred to Mr. Abbas’s fledgling attempt to form a unity government with Hamas.

European officials have hailed the idea of a unity government as a new element that might enable the sanctions on the Hamas-controlled Palestinian Authority to be lifted. By joining such a government, they have argued, Hamas would tacitly accept the benchmarks. Such acceptance could enable the authority to renew payment of salaries to government workers.

America has been skeptical, several diplomats involved with the Quartet said. Any transfer of funds to an authority in which Hamas is a member carries legal complications, as Hamas is on the State Department’s list of terror organizations.

Nevertheless, after a meeting with her Quartet partners at Secretary-General Annan’s office yesterday, Secretary of State Rice signed on to a joint statement that “welcomed the efforts” of Mr. Abbas to form a unity government “in the hope that the platform of such a government would reflect Quartet principles and allow early engagement.”

In Gaza, Mr. Haniyah, who since the Hamas election victory last year has served as the prime minister of the Palestinian Authority and who was a candidate to serve in the same position in the unity government, ended any likelihood that Hamas would sign on to the “principles.”

As he faced demonstrators demanding their government salaries, which have not been paid since the Quartet announced its benchmarks in January, Mr. Haniyah was defiant.

“They demand we condemn the resistance and recognize the legitimacy of the occupation,” he said. “We do not accept these conditions.”

Doing so would “damage the interests of the Palestinian people,” he said.

While Americans have argued all along that lifting the sanctions would add to the waning popularity of Hamas, European and U.N. officials have said the dire conditions in Gaza must end, even if the Hamas-controlled government does not sign on to the Quartet’s benchmarks.

“They are not conditions. I know they have been widely interpreted as such,” Mr. Annan’s envoy to the Middle East, Alvaro de Soto, told The New York Sun. “At some point, either on the way, or at the end of the process, we’ll make an assessment of whether” the Palestinian Arab leaders “reflect those principles, and if not to what extent they go in that direction, or whatever.”

Israeli officials said the unity government might not even be formed. “We also welcome any effort to form a government that would accept the benchmark,” an aide to Ms. Livni, Ido Aharoni, told the Sun. “We too would like to improve the humanitarian conditions in the territories.”