Much of our foreign aid goes to corrupt governments, where the majority of the money ends up in the pockets of despots and tyrants, rather than in the hands of the people. In the case of the Palestinian Authority, this does not seem to be the case. There have been no stories of rampant corruption in their government. Further, the BBC reported that fully a third of the Palestinians rely on civil payments for their sustenance. Those people are passing desparate on their way to starvation.
What that tells me is that withholding this money is going to lead directly to Palestinian suffering, which will in turn lead to Palestinian resentment and hatred towards America. The last thing we need right now is more hatred towards America.
Further, I'm not sure what the Bush administration hopes to accomplish with this. Does he expect Hamas to say "sorry, we were just kidding, we'll back out of the government?" It's not like the Palestinian people have the authority to order new elections. Further, it's not clear that a new election would have a different result.
Indeed, one quite likely outcome is that the Palestinian Authority gets weakened to the point where it falls into chaos, leaving an opening for Israel to step in and take over. This will not be a good thing for the world.
I believe we will be sorry in the long run. America should reinstate its foreign aid to the Palestinian Authority.