The Palestinians' dependence on aid is slowly easing but Israel must lift restrictions blocking their territories' economic development, an international panel that coordinates assistance said Tuesday.

The Ad Hoc Liaison Committee said that this year the Palestinian Authority is seeking $1.2 billion from donors, down from $1.8 billion in 2008 and a bit less last year.

The committee, chaired by Norway and co-sponsored by the United States and the European Union, met in Madrid to discuss aid priorities for 2010 as the Palestinians work to create government institutions that would be the foundation of a future state.

Donor countries have given billions of dollars to the Palestinians since 1993 to prop up an economy battered by conflict with Israel and Israeli restrictions on Palestinian trade and movement.

Palestinian exports from the West Bank, for instance, are hampered by slow movement of goods through Israeli-controlled crossings into Israel or Jordan.

Palestinian Prime Minister Salam Fayyad, who was here for the meeting, said that if Israel were to lift its blockade of the Gaza Strip, the Palestinians' need for aid would drop by $500 million a year.

The committee said Israel had relaxed some restrictions in the West Bank and called on it to take further steps to dismantle access and movement restrictions and measures impeding trade.

Former British Prime Minister Tony Blair, representing the Mideast Quartet - the United State, the United Nations, Russia and the European Union - said the Palestinians are proving to need less aid because they are managing assistance funds and their own affairs better.

Blair told a news conference the biggest difference is basic law and order on the ground. He said the Palestinian Authority is providing better security in the West Bank and this allows for more business activity and investment.

"It is not very complex. Better governance leads to improved economic activity leads to greater self-reliance on the part of the Palestinians. And that is what they want to achieve."