The government has announced it will continue to provide taxpayer-funded aid to the Palestinian Authority, with a series of “critical changes” to how the system has previously been run.

Britain said today it wanted to “maintain stability, provide vital services and build and strengthen the institutions needed for a viable two-state solution”.

Fears had previously been expressed over the status of the PA if Britain pulled all its funding.

The Labour Friends of Israel group had urge the government over recent months to investigate where the money is sent and whether funding sent to the PA is used to pay the families of Palestinian terrorists.

In a statement, the Department for International Development said it was continuing to examine UK aid to the Palestinian territories but was imposing a series of “critical changes”.

From now on, British aid will focus “solely on vital health and education services”, with funding going towards “the salaries of health and education public servants on a vetted list” only.

No more UK funding will be available to PA workers in Gaza, and Britain will assess the PA’s “fiscal and public financial management reforms” with targets set in order to secure future payments.

It is expected that British money will be used to pay salaries of up to 30,000 Palestinian teachers, doctors, nurses and midwives. The funds will be used to ensure around 25,000 Palestinian children continue their education, are immunised, and have medical consultations.

There will be up to £25m of DfID money sent to the PA in this financial year.

Paul Charney, Zionist Federation chairman, said: “The scandal of salaries for terrorists has been an issue that the Zionist Federation has campaigned on for a long time.

"Over the years, thousands of emails were sent to politicians – all of which were re-buffed by an apparently impenetrable shield of denial.

“Today’s dramatic shift in funding priorities means that finally DfID is acknowledging that there is a fundamental problem with the Palestinian Authority’s lack of accountability and support for violence.

"It remains to be seen if UK taxpayer money will make its way to the intended targets – doctors and teachers. But this is an important change in the UK’s attitude towards Palestinian aid, and we hope it will contribute to a change in the PA’s attitude as well.”

It was reported in October  that the aid scheme was in "utter chaos" amid claims Britain had pulled its funding altogether.

Priti Patel, International Development Secretary, was thought to have ordered her civil servants to "freeze" all aid to the PA, over fears that the money was being diverted to fund terrorism.

That move was widely welcomed by groups including the Board of Deputies and both the Conservative and Labour Friends of Israel.

But it was later suggested the move had been merely a "postponement", to allow reviews to take place and address concerns.

On Monday, Theresa May told the Conservative Friends of Israel annual lunch that the government had a "duty" to ensuring "the funds go to the right places".

She said: "Let me be clear: no British taxpayers’ money will be used to make payments to terrorists or their families.

"It is right that Priti Patel has called for an examination of aid spending in the Occupied Palestinian Territories to ensure that every penny is spent in the right places and in the right way.

"And she is looking at options for the UK to support co-existence projects in the region – something I know so many people in this room have called for.

"We are determined to get the right help to those who need it most – and I pay tribute to Priti for leading that work."