RAMALLAH, West Bank, May 9 (Ali Sawafta/Reuters) - The Palestinian Authority said on Monday it had not been able to pay public sector salaries for the first time since 2007 because of Israel's decision to halt the transfer of tax funds.

Prime Minister Salam Fayyad said Israel's decision, taken in protest at a Palestinian unity deal involving the Islamist group Hamas -- had put the Ramallah-based government in an impossible financial position.

Fayyad said the Palestinian Authority (PA) had paid salaries to its 150,000 employees on the 5th day of every month since mid-2007. We are now on the 9th and we have not been able to meet this obligation, he said.

The Israeli government headed by Prime Minister Benjamin Netanyahu decided on May 1 to halt the transfers of Palestinian taxes which make up 70 percent of PA revenues, citing fears that the money would go to Hamas, a militant group hostile to Israel.

The situation was difficult before Israel halted the transfer of money. Now, with Israel halting the transfers, it is impossible, Fayyad said.

He added the PA would not be able to pay the monthly wage bill, which totals almost $170 million, until Israel handed over the tax money or foreign governments stepped in to fill the financial gap.

The European Commission announced on Friday it would provide an additional 85 million euros ($122 million) in aid in 2011, with 45 million euros of this earmarked for salaries for key workers. It was not clear when these funds would arrive.

The PA, which is heavily dependent on the financial support of donors including the United States and the European Union, has called for international intervention to persuade Israel to reverse the decision.

UN Secretary General Ban Ki-moon told Netanyahu on Friday Israel should not withhold the revenues.

Fayyad said there had been no communication with the Israeli finance ministry since the cancellation of a monthly meeting held to coordinate the transfer of the revenues, mostly collected on goods imported via Israel to PA-controlled areas.

This matter has obstructed the capacities of the authority and has limited its ability to perform its duties, especially the salaries, Fayyad told journalists in Ramallah.

The salaries paid by the PA include those of around 70,000 employees in the Gaza Strip, who continued to receive their wages even after Hamas seized control of the territory in 2007.

Hamas and Fatah, a rival Palestinian faction led by PA President Mahmoud Abbas, reached the surprise agreement to end their feud in Egyptian-mediated talks sealed with a public ceremony in Cairo last week.

Hamas is opposed to the peace negotiations Abbas has pursued with Israel with the aim of reaching an agreement creating a Palestinian state on land alongside Israel. Hamas, which has Iranian and Syrian support, is committed to fighting Israel.

In the Cairo agreement, Hamas and Fatah agreed to the creation of a new, technocratic government that will hold elections within a year. The United States has said the new government must recognize Israel and renounce violence -- terms Hamas has previously rejected.

A Hamas-led government that took office in 2006 faced a Western boycott, plunging the PA into financial crisis because of the group's refusal to agree to those terms.

Palestinians believe the surprise unity deal unveiled on Wednesday will strengthen their hand as they seek international backing for independence, presenting a united front and ending a divide that has set back their quest for statehood.

(Writing by Tom Perry, Editing by Andrew Heavens)