WASHINGTON (Reuters) - President Bush plans in his State of the Union address on Wednesday to pledge greater assistance for the Palestinians, including a financial aid package that could total nearly $350 million to bolster development and security, sources familiar with the plan said.

The announcement would highlight Bush´s support for Palestinian President Mahmoud Abbas, elected last month to replace Yasser Arafat, whom Bush shunned as an obstacle to peace until his death.

"The goal of two democratic states, Israel and Palestine, living side by side in peace is within reach -- and America will help them achieve that goal," Bush said in remarks prepared for his State of the Union speech.

Sources said U.S. aid would help the Palestinians prepare for Israel´s withdrawal from Gaza later this year, and is expected to be tied to Palestinian efforts in stopping violence and carrying out reforms.

Earlier this week, Secretary of State Condoleezza Rice held out the possibility of U.S. support to train and equip Palestinian forces. She will visit the region next week.

Most of the American money is expected to flow through nongovernmental organizations because key U.S. lawmakers are wary of providing direct aid to the Palestinians.

Following Arafat´s death, Bush provided $20 million directly to the Palestinian Authority, but on condition that the money be used to pay Israeli utility bills.

Rep. Jim Kolbe, who chairs the House of Representatives subcommittee overseeing foreign aid, said he expected Bush to request Palestinian funds on Wednesday night, and predicted it would pass Congress.

"I think it will be controversial but I think we can get it through," the Arizona Republican said.

GESTURE OF SUPPORT

Edward Walker, president of the Middle East Institute and former assistant Secretary of State for near eastern affairs, said he regarded the money -- if announced -- as a gesture of support for Abbas, also known as Abu Mazen.

"It is a measure of (their) effort to avoid what happened the last time, when Abu Mazen became prime minister, in which nobody did anything for him and he quickly lost credibility and couldn´t stand up to Arafat," Walker said.

It was not immediately clear whether the new aid package -- which sources said would total close to $350 million -- would include the $75 million in aid that the United States already provides annually in the West Bank and Gaza.

Under the new aid proposal, Bush would include around $200 million for the Palestinians in his $80 billion package to fund military operations in Iraq and Afghanistan, sources said.

The rest of the money is expected to come from funds set aside under an agreement reached in 1998, the sources said.

Israel, which already receives about $3 billion a year in U.S. aid, is asking the United States to help pay for new crossing points along its barrier with Palestinian areas. Sources said Israel wants Washington to contribute an estimated $180 million toward the $450 million project.

Bush strongly supports Israeli Prime Minister Ariel Sharon´s plan to evacuate all 8,000 settlers from Gaza and a few hundred of the 230,000 in the West Bank later this year under an Israeli "disengagement" plan.

Bush has approached European leaders in recent days to coordinate efforts to restart peace talks since Arafat´s death, and has backed British plans for a Middle East conference aimed at fostering Palestinian reforms.

The World Bank says the Palestinians could expect an extra $500 million a year in vital aid if violence stopped and there was progress toward peace with Israel. (Additional reporting by Arshad Mohammed and Anna Willard) (© Reuters 2005 02/02/05)