A new report from the World Bank warns that projected cuts in economic aid to Palestinians once the Islamic militant group Hamas forms the next Palestinian government, could cause a deep economic depression in the Palestinian territories.

Palestinians carry vegetables through a barricade facing Israeli checkpoint in southern Gaza Strip town of Khan Yunnis (File photo)

The World Bank report warns of a bleak economic future for Palestinians if international donors go through with plans to cut financial assistance to the Palestinian Authority. Nearly three-quarters of the estimated annual $1 billion budget of the Palestinian Authority is funded by international donors.

Most international donors have said they will no longer be able to make direct disbursements to a Hamas-dominated Palestinian Authority because of the group's refusal to recognize Israel and disarm. Israel also says it is halting the transfer of about $50 million a month in customs and tax revenue it collects and disburses to the Palestinian Authority, because it says Hamas will be able to control the money.

As a result the World Bank warns personal incomes in the Palestinian territories could drop by as much as 30 percent this year. Unemployment could double to nearly 40 percent, and the Palestinian economy could shrink by nearly 30 percent. Nasr Abdul Karim a professor of economics at Bir Zeit University in the West Bank city of Ramallah says if all of the projected cuts go through, the economic effects will be devastating.

"Then, the Palestinian treasury will be in deep problems because the deficit will rise almost 80 percent of the budget and that will be very high," he said. "So the Palestinian Authority will be hit the most. And 150,000 staff employees with the PA., because it is the largest employer here in Palestine, will be left without regular income, and that has a lot of political and social consequences here."

International donors and Israel say, while direct disbursements of funds to the Palestinian Authority could stop once Hamas takes office, humanitarian aid will continue to Palestinians through non-governmental organizations.

Samir Abdullah is the director of the independent Economic Studies Institute in Ramallah. He says funding humanitarian aid projects will not fill the gap left by cutting funding to the Palestinian Authority.

"If you take the basic services to the public, more than 80 percent from education is public, governmental actually and more than 50 percent of the health services are governmental. And of course if you take the 150,000 employees who represent about 25 percent of the labor force, they are government employees," said Abdullah. "Most of these people are really living from their income. The governmental budget provides a lifeline to keep the economy going."

Hamas leaders say they are seeking alternate sources of funding in the Muslim world, in countries like Iran. However so far there is no indication that funding has been found to make up a projected budget shortfall that the World Bank warns could cripple the Palestinian economy and result in social chaos.