Israel's central bank has proposed using a state-owned institution to supply funds to Gaza banks after private lenders began severing ties to the Strip after Israel declared it "hostile territory," officials said on Wednesday.

The anemic Gaza economy depends on Israeli shekels, long provided by Israeli commercial banks with a green light from the Israeli government, to finance imports, pay Palestinian Authority workers and carry out day-to-day transactions.

Providing salaries to PA Chairman Mahmoud Abbas' loyalists in the territory is part of a U.S.-led strategy, backed by Israel, to strengthen the Western-supported leader and weaken Hamas, which violently took over the Gaza Strip in June.

But Gaza's money supply was cast in doubt on Tuesday when Israel's biggest commercial bank, Bank Hapoalim, said it planned to halt transactions with Palestinian banks in the Gaza Strip. Other Israeli banks, including Discount Bank, were expected to follow suit.

Such a move could deepen economic hardship in the impoverished territory and undermine Abbas' standing - along with the Israeli government's declared policy of bolstering him.

Abbas' government in the West Bank uses shekels to pay salaries to tens of thousands of its employees in the Gaza Strip.

It is unclear whether the Bank of Israel's proposal to have the state-owned Israel Postal Bank take over Gaza transactions for the private banks will win Israeli government approval.

Israel declared the Hamas-controlled Gaza Strip an "enemy entity" last Wednesday and said it would reduce its fuel and power supplies to the territory in response to rocket attacks by Palestinian militants.

It has yet to carry out any cuts and pledged to keep humanitarian aid flowing.

"How can you do business with an enemy entity? There are a lot of questions nobody thought about when they made the decision," said a senior Israeli official involved in the matter.

Avi Hochman, president and chief executive officer of the Israel Postal Company, which includes the Postal Bank, said the proposal was developed earlier this week and presented to him by the Bank of Israel and the Finance Ministry.

"We are considering it. There are some legal, logistical and operational issues that we have to find a solution to. Once we find a proper solution that will enable us to provide the services, we will be happy to provide them," he told Reuters.

He said the Israel Postal Bank has the financial capacity to fill the financial void left by Bank Hapoalim and Discount Bank. "Capacity is not an issue," he said.

The Bank of Israel declined to comment on the proposal.

New shekels are needed in Gaza to replace those leaving the territory to pay for imports, mainly from Israeli suppliers.

Without new shekels, Palestinian banks could run out of currency to cover deposits. A Palestinian banking official said the move could force Gaza banks to shut down.