From a Haaretz article yesterday headlined "Israel convinces Europeans Arafat is financing terror"

The European Commission has accepted Israel's claims that the Palestinian Authority is supporting terrorist attacks, but is rejecting Israel's demands that it suspend financial aid to the PA. The commission says Israel has failed to prove that European Union funds are being used to finance terror.
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Meanwhile, in the shadow of the Israeli accusations, the European Parliament's budgetary committee last week delayed the transfer of 18.7 million euros in financial aid to the PA until the EC reports how the money is to be distributed.

Commissioner Patten, and the EC's budget commissioner, Michaele Schreyer are scheduled to address the committee on the matter on June 19.

The EU is the PA's largest donor, providing about one-tenth of the PA's annual budget. EU aid to the PA totals around 10 million euros a month and is subject to IMF supervision, but a member of the delegation to Israel said there would be no choice but to tighten supervision. The aid is meant to finance salaries for teachers, health officials and PA police.

The Haaretz article does not indicate that the EU budgetary committee's decision was related to the civil suit filed against the EU by Steven Blumberg and attorney Nitzana Darshan-Leitner as claimed here. (link from Charles Johnson). From the Haaretz article, the sound of it is that the EU will take steps so that it funds only specific "financially transparent" projects. Of course, that just frees up other money to fund bomb and mortar factories etc.

According to an article by Zeev Schiff about 2 weeks ago in Haaretz, Arafat micro-managed PA finances to the extent that his personal approval was required for air travel for senior PA officials. Also ...

Arafat's involvement [in terrorism] is at the ideological and financial level, including making out checks to the Al-Aqsa Brigades and the Tanzim militia when it began to carry out suicide attacks.

Update: Arutz-7 says that EU funds were specifically designated for the PA's "Preventative Security Forces", whose recruits included many veteran terrorists active in the Tanzim and Al-Aqsa Brigades. The US Congress then withdrew funding for the organization but the EU continued to contribute. (report)