WASHINGTON, June 2 (Reuters/ Lesley Wroughton and Patricia Zengerle) - President Barack Obama's administration said on Monday it plans to work with and fund the new Palestinian unity government, and Israel immediately voiced its disappointment with the decision also criticized by some U.S. lawmakers.

Palestinian President Mahmoud Abbas swore in a unity government on Monday in a reconciliation deal with Hamas Islamists, who advocate Israel's destruction.

The United States views Hamas as a terrorist organization and the U.S. Congress has imposed restrictions on funding for the Palestinian Authority, which typically runs at $500 million a year, in the event of a unity government.

Senior U.S. lawmakers said Washington should suspend aid until it is sure of the Islamist group's commitment to pursuing peace with Israel.

In its first comment since the Palestinian government was sworn in, however, the State Department stressed that it regarded the new cabinet as made up of technocrats and was willing to do business with it.

At this point, it appears that President Abbas has formed an interim technocratic government that does not include ministers affiliated with Hamas, State Department spokeswoman Jen Psaki told reporters at a press briefing.

Based on what we know now we intend to work with this government but will be watching closely to ensure that it upholds principles that President Abbas reiterated today, she said, referring to Abbas' commitment to honor past peace deals.

In Jerusalem, an Israeli official, requesting anonymity, said in a statement: We are deeply disappointed by the State Department regarding working with the Palestinian unity government.

The statement said Washington could advance peacemaking by urging Abbas to end his pact with Hamas and return to peace talks with Israel.

EVALUATING POLICIES

Asked if her comments meant U.S. aid would keep flowing, Psaki replied: It does, but we will continue to evaluate the composition and policies of the new government and calibrate our approach accordingly.

By law, the U.S. aid may not benefit Hamas or any entity effectively controlled by Hamas, any power-sharing government of which Hamas is a member, or that results from an agreement with Hamas and over which Hamas exercises undue influence.

But several senior U.S. lawmakers said Washington should suspend the annual aid, which needs authorization by Congress.

Funding for the Palestinians is off-the-table until it is clear that the unity government is committed to peace and security, said Republican U.S. Representative Kay Granger of Texas, chairwoman of the House of Representatives State and Foreign Operations subcommittee.

New York Representative Eliot Engel, the top Democrat on the House Foreign Affairs Committee, said the Palestinian Authority was casting doubt on its commitment to the peace process and threatening future assistance.

The United States is under no obligation to give a dime to the PA as it reconciles with a known terrorist group, he said. (Reporting by Lesley Wroughton and Patricia Zengerle; Writing by Arshad Mohammed; Editing by Doina Chiacu and Mohammad Zargham)