Israel must strike a balance between ensuring short-term security and helping the Palestinian territories develop economically to secure a more stable future, a British government report said on Monday.

The report, "Economic aspects of peace in the Middle East," said the economic outlook for the Palestinian economy is already bleak and with its population growing rapidly the situation is unsustainable.

"Striking the balance between Israeli security and Palestinian economic freedom poses a great challenge for Israeli policymakers and security officials, but it is one that cannot be avoided," the report said.

The report recommends immediately removing obstacles to travel within the West Bank and operating continuous and predictable border crossings for goods and people into and out of Gaza.

It was commissioned by Prime Minister Gordon Brown in 2005, when he was finance minister. He has long argued that the political and security situation can only improve if there is a strong and sustainable Palestinian economy.

The report concludes the private sector must grow in the territories for there to be any chance of keeping unemployment at already "unacceptably high" levels and a stable relationship is needed between the Palestinian and Israeli economies.

The economy must diversify, larger private sector firms need to produce goods for markets beyond Israel and reliable export routes need to be opened up through Jordan and Egypt, it said.

And the private sector can only develop if there is a sound, transparent management of public finances, improved movement of people and goods and investment in trade-related infrastructure, energy, housing and water.

Palestinian Authority Chairman Mahmoud Abbas has been pushing for Israel to remove some of the hundreds of checkpoints that restrict travel to the West Bank and put a stranglehold on the economy.

He has also called on Middle East envoy and former British prime minister Tony Blair to spell out steps to bolster the Palestinian economy in an "action plan" he is developing.

Aid groups are concerned about the collapse of the economy in Gaza since Hamas seized power this year and have been calling for the Karni crossing into Israel to be reopened.