Palestinians left helpless by Israelis, World Bank warns

The Palestinian economy is starting to "hollow out" as Israeli closures and an unprecedented flight of capital leave an already deeply impoverished Gaza and the West Bank dependent on aid, the World Bank will tell international leaders next week.

Tony Blair, the new international Middle East envoy, and key donor countries meeting in New York will be given an alarming picture of economic run-down in which Gaza in particular faces an "extreme scenario" in which children under 15, comprising half the population, will soon "be thrust into a non-existent labour market".

The report warns that even with the lifting of the international embargo on the emergency Palestinian government in the West Bank, it still faces a deficit, arrears and falling revenues which it estimates will require a $1.62bn (£807m) aid package to close its fiscal gap.

According to the report, the closure of the Karni cargo crossing between Gaza and Israel since mid June is causing a collapse of productive industry and agriculture.

The report says that Hamas control of Gaza is incurring a "direct negative impact" on the economy. But it warns that any discussion on economic recovery and peace is incomplete without Gaza, where 40 per cent of Palestinians live.

It says the "main challenge" for the Palestinian economy are restrictions on Palestinian movement and access. While accepting the legitimacy of Israel's security concerns, the World Bank says these are difficult to reconcile with the continued "protection and expansion" of Jewish settlement activity in the West Bank, which previous reports have blamed for the imposition of many of the restrictions in the first place.

Shimon Peres, Israel's President, insisted to foreign reporters that the restrictions were caused by Palestinian militant activity.