Palestinian industry is bound to fail unless Israel lifts tight restrictions on trade and movement of people and goods in the Palestinian territories, a World Bank study concluded Monday.

The study, which focused on the investment climate in the West Bank and Gaza, also stated that Palestinian producers must move to higher value goods and look beyond Israel to new markets in Europe and the Arab world.

"The Palestinian Authority made some progress in the past 10 years in creating an enabling investment climate, but Hamas' rise to power last year put a stop to that," the study claimed.

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Israel has severely tightened travel and trade restrictions on the West Bank and Gaza since 2000. Following Hamas' election victory last year and the capturing of an Israel Defense Forces soldier by Hamas-linked militants, Israel further restricted the movement of goods and people out of Gaza.

"Restoring free movement between the West Bank and Gaza is a precondition for a viable Palestinian economy," the report said, recommending that Israel lift most of the restrictions imposed in recent years. Without a concerted political effort to re-open markets and lower transaction costs, the Palestinian private sector is bound to fail, the report stated.

Israeli Foreign Ministry spokesman Mark Regev said Israel had no desire to see a failed Palestinian economy, which he said would not only be a tragedy for the Palestinians, but would provide impetus for greater regional instability. Israel has said the restrictions are necessary for security - to prevent suicide bombers and other attackers from entering the country.

"Israel is fully aware of the economic conditions prevailing in the West Bank and Gaza, and together with the international community is doing everything possible to alleviate hardships," Regev said.

The study noted that small Palestinian industrial enterprises account for only 12 percent of the Palestinian economic output. By contrast, the share of industry in neighboring Jordan is almost 30 percent.

During the last 40 years, the Palestinian economy has become increasingly dependent on Israel. Tens of thousands of Palestinians have worked in Israel, raising income levels in the West Bank and Gaza.

The study claimed that Israel's government had become a barrier for industrial development in the Palestinian Authority by refusing most permits for businesses that compete with Israeli products.

Nearly 60 percent of the West Bank's exports, mostly labor intensive, low value goods, are sold to Israel, while 90 percent of imports come from Israel.

"Palestinian businesses must change direction," the study suggested. "It is clear that while Israel will remain the largest trading partner for the time being, the Palestinian economy cannot rely on Israel indefinitely," the report said. "The domestic economy is small, so Palestinian producers must seek out new markets and enter them directly ... without Israeli intermediaries."

"However, the Palestinians' low value goods, such as furniture, textile and shoes, have become less competitive because of high production costs," the study said, urging Palestinian manufacturers to move to higher value goods.

Mazen Sinokrot, a prominent businessman in the West Bank, said he agreed that the Palestinians should seek new markets. However, he said it will be difficult as long as Israeli restrictions remain. He noted that it costs him an extra 5 percent to ship pickles and olives from the West Bank to Jordan because cargo has to be moved from one truck to another during border security checks.

The study urged immediate implementation of a 2005 U.S.-brokered agreement on movement and access for Palestinian goods and travelers. Most elements of the deal were not carried out after Hamas took power and the kidnapping of IDF soldier Gilad Shalit last June.

"As a first step, Gazans should be allowed - as stipulated in the agreement - to export through the Rafah crossing between Gaza and Egypt, with Egypt serving as a transit route to Europe and the Gulf," the report stated.

Palestinian negotiator Saeb Erekat said Sunday that he hopes to sign a new customs protocol with Israel soon, and that this could pave the way for Rafah exports.

The World Bank said Israel needs to lift its movement restrictions within in the West Bank and allow for truck convoys between the West Bank and Gaza, as stipulated in the agreement.

Palestinian Authority Chairman Mahmoud Abbas raised the issues in a meeting with Israeli Prime Minister Ehud Olmert on Sunday, but did not get specific promises, Erekat said.