GENEVA - The United Nations' trade and development agency warned Tuesday that the Palestinian economy was declining dramatically, leading to a worsening this year of already high unemployment and poverty levels in the West Bank and Gaza Strip.

"The economy of the occupied Palestinian territory is on the verge of collapse," the UN Conference on Trade and Development said, adding that "projections indicate economic decline to levels not seen for a generation."

The Geneva-based body, known by its acronym, UNCTAD, said per-capita income in the Palestinian territories would fall in 2006 to half of what it was before an outbreak of Israeli-Palestinian fighting late in 2000.

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Median income, it projected in its 19-page report, would also fall well below the absolute poverty line and more than half the Palestinian work force will be affected by unemployment by the end of the year.

"Projections point to unprecedented unemployment, poverty and social tensions," the agency said. "Added to this has been a weakening of the Palestinian government's managerial and technical capacities."

UNCTAD said the economic crisis was being compounded by decreasing levels of aid from foreign governments and institutions since the militant group Hamas swept January parliamentary elections. Western nations and Israel have been withholding hundreds of millions of dollars from the Hamas-led government because of the group's refusal to disarm, recognize Israel and accept existing peace agreements.

On Monday, the Hamas government said it would form a coalition with the Fatah movement of Palestinian Authority Chairman Mahmoud Abbas. Hamas, which Israel and the West have labeled a terrorist group, agreed to give Abbas authority over dealings with Israel. Abbas has long called for a resumption of peace talks.

Hamas officials said the agreement did not amount to direct recognition of Israel. But elements of the platform - including acceptance of an Arab plan for a comprehensive Middle East peace agreement - suggest recognition of Israel.

While such a move could potentially lead to increased foreign aid and transfer payments from Israel, previously the main source of government salaries before Hamas took power, UNCTAD said the resumption of such programs would fail to solve all the economic problems facing Palestinians.

"Even under a more positive scenario of increased aid, greater mobility and the resumption of Israeli transfers of tax revenues to the PA, the Palestinian economy is unlikely to achieve sustained growth," cautioned the report, which went to press before Hamas' announcement.

The payment of erratic, small stipends has done little to alleviate the plight of many Palestinians and tens of thousands of civil servants launched an open-ended strike last week to protest the government's failure to pay them for the past six months.

UNCTAD said real disposable income for Palestinians could plummet by about $1,200 (-944) per person in 2007 - with the Palestinian debt to Israel rising to some 40 percent of its economy as a result of the one-way flow of goods across Israel's border.

The economy, according to one scenario outlined in the report, could be 35 percent lower by the end of 2007 compared with last year.

"Conditions similar to those now emerging have harmful long-lasting effects on the economy that do not go away once adverse conditions are alleviated," it said. "The prospects of the Palestinian economy are hostage to political constraints and emergency needs generated by protracted conflict."