A gathering crisis in the Palestinian economy will worsen unless foreign funding increases and Israel eases long-standing curbs on development, the World Bank and International Monetary Fund said on Wednesday.

"Looking ahead, with persisting restrictions, financing difficulties with aid shortfalls, and stalemate in the peace process, there is a high risk of a continued economic slowdown, a rise in unemployment, and social upheaval," the IMF said.

In a separate report issued ahead of a conference on Palestinian aid in New York next week, the World Bank forecast a $1.5 billion deficit in the Palestinian Authority budget in 2012, with donor funds expected to cover just $1.14 billion of this shortfall.

"Donors do need to act urgently in the face of a serious fiscal crisis facing the PA in the short term," Mariam Sherman, the World Bank's country director for the West Bank and Gaza Strip, said in a statement.

The PA, which exercises limited self-rule in the West Bank, receives most of its aid from the United States, the European Union and Arab nations. But over the past several years there has been a shortfall in aid coming from Arab states, resulting in the PA being unable to pay salaries to its 153,000 civil servants on time, on several occasions this year.

A hike in taxes in early September caused by economic accords with Israel that peg Palestinian sales tax to high Israeli rates sparked demonstrations and violence across the West Bank, coupled with calls for the government to resign. To end the protests, Prime Minister Salam Fayyad last week announced he would roll back the tax increases.

Yesterday's reports said the presence of Jewish settlements, which control some 42% of West Bank territory, was stifling the potential for Palestinian economic growth.

To build their economy, the World Bank said, the Palestinians need access to Area C, the territory covering 60% of the West Bank where Israel maintains full control under interim peace accords and most settlements are located. Area C includes most of, but not all, the settlements.

"The continuous growth in the size of land that is allocated for settlement activity within the West Bank has fragmented the territory into smaller and more disconnected enclaves," the World Bank said.