The State Department is considering supporting the Palestinian Authority in its quest to avoid paying hundreds of millions of dollars in judgments won by American victims of Palestinian terrorist attacks in Israel, according to Palestinian officials and defense lawyers involved in the cases.

U.S. officials insist that no decision has been made regarding the complex litigation, which could force the Bush administration to choose between supporting compensation for victims of terrorism and bolstering the Palestinian government as the United States presses for a breakthrough in Israeli-Palestinian peace talks...