The International Monetary Fund (IMF) called for "urgent action" to help revive the Palestinian economy, saying it had been choked by Israeli restrictions and political uncertainty.
"Urgent actions are needed by the Palestinian Authority (PA), by the Government of Israel, and by donors to stabilize the fiscal position and rekindle economic growth over time," the IMF said in a statement.
The fund said the situation in the West Bank and the Gaza Strip had deteriorated in recent months, pointing to rising unemployment which had claimed nearly a quarter of the labor market in late 2012.
"Israeli restrictions on movement and access are virtually unchanged and continue to hamper growth prospects," the IMF said, noting that gross domestic product had risen by only six percent last year compared to an average of around 11 percent in 2010 and 2011.
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Further slippage in GDP to around five percent was possible this year, the IMF said, citing "increasing political uncertainty" in the region.
"The military confrontation between Hamas and Israel last November, continued settlement expansion, and recent outbreaks of unrest in the West Bank underline the common view that prospects for peace remain dim," the IMF said.
The fund's analysis also said the Palestinian Authority faced a "liquidity crisis" with public spending on an "unsustainable" trajectory.
"If left unchecked, these trends will ultimately lead some to question the legitimacy of the PA and undermine its ability to govern effectively," the IMF remarked.
The fund called on the international community to increase financial support to the Palestinian Authority while urging "enhanced economic cooperation with Israel."
The IMF analysis echoed a report by the World Bank on Tuesday ahead of a meeting of international donors on March 19, which warned of "lasting damage" to the Palestinian Authority's economy wreaked by Israeli restrictions and the worsening fiscal situation.