The Palestinian economy shrank 21 percent in the fourth quarter of 2006 compared with the previous year, suffering from the effects of international sanctions and restricted flow of goods into the Gaza Strip, officials said Sunday.

The Palestinian Central Bureau of Statistics said most sectors of the economy suffered declines, including manufacturing, education, tourism and health care.

Sufian al-Barghouti, the bureau's director for economic statistics, said the steep drop in economic activity was largely the result of international sanctions imposed after Hamas won legislative elections last year and gained control of the government. Up to now, foreign aid has made up about half of the government budget.

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After Hamas took office in March, Israel cut off more than $50 million in monthly tax transfers, while Western donors halted hundreds of millions of dollars in aid. Both Israel and the West have demanded Hamas renounce violence, recognize Israel and accept past peace accords before the funds will be restored.

Hamas has rejected the demands, despite being unable to pay salaries of most of its 165,000 government workers.

When there is a decline in people's incomes, their purchases go down. Their demand for goods and services go down, he said. That pushed the economy to the crisis.

In Gaza, Palestinian Economics Minister Ala al-Araj blamed the international sanctions and Israeli restrictions on the flow of goods in and out of Gaza for the state of the economy.

"Either Israel has to leave us to run our own affairs or take responsibility," he said. He also said it is the international community's responsibility to help the Palestinians.

Foreign Ministry spokesman Mark Regev said the Palestinian leadership
should look in the mirror instead of always pointing the finger at others.

"Unfortunately, the Palestinians have chosen a leadership that isolates them from the international community," Regev said. "No one wants to see the Palestinian people unnecessarily suffer because of the shortsightedness and extremism of the Palestinian leadership."

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