JERUSALEM, Aug 15 (Reuters) - Palestinian Finance Minister Salam Fayyad said on Thursday a holding company had been formed to consolidate all Palestinian Authority funds and assets under a single umbrella, a reform that meets a key U.S. demand.

Fayyad said in an interview with Reuters that Palestinian President Yasser Arafat gave formal approval on Wednesday night to the creation of the new Palestinian Investment Fund which would be under the finance minister's direct control.

U.S. President George W. Bush had demanded the Palestinians overhaul their finances, clean up corruption and choose leaders "not compromised by terror" before he would back the eventual creation of a provisional Palestinian state.

Fayyad, a former senior World Bank official who was named finance minister in a shakeup of Arafat's cabinet in June, said the new holding company would ensure transparency and accountability.

"If there is an asset of any kind which is either wholly or partially owned by or on behalf of the Palestinian Authority, if it is not in the fund, it will be illegal," Fayyad said from a hotel conference room in East Jerusalem. Nampa-Reuters 0124 150802 WEB story ENDS (NAMPA 150128)