Hamas is demanding the return of 640,000 euros (US$817,920) confiscated from one of its senior officials trying to smuggle it into the Gaza Strip on Friday.
Palestinian President Mahmoud Abbas ordered a criminal investigation after EU monitors at the Rafah border crossing discovered the money hidden in a belt worn by Sami Abu Zuhari, a Hamas spokesman, when he dropped it.
The cash was handed to Palestinian customs officers under the authority of Abbas.
About 100 armed Hamas men laid siege to the border crossing to demand the return of the money, but later withdrew.
Zuhari, who was returning from Qatar, said the cash came from donations made by Arab countries to help Palestinian prisoners after foreign aid was cut off following Hamas' election victory.
The standoff added to growing tensions in the territory after Hamas deployed its own security forces on the streets this week in defiance of Abbas. US Secretary of State Condoleezza Rice warned that the move has created a "dangerous situation" that the Palestinian president must resolve.
Rice said Abbas had frequently spoken of the need for "one authority and one gun" and therefore he should not accept Hamas using 3,000 of its own armed men to police the streets.
"It's a very tense situation and one that we hope will be resolved. We obviously believe that President Abbas, who we believe has the confidence of the Palestinian people, should be able to exercise his responsibilities as president of the country," she said.
But Palestinian Prime Minister Ismail Haniyeh said the force would remain.
"We do not intend to make one step backward. The force will stay. Their task is to protect internal security and if there will be a need to increase its number, we will do it," he said yesterday.
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