The outgoing U.S. envoy to the so-called Middle East Quartet has issued a final report that questions the actions of the Western powers against the Palestinian Authority, which is now led by the Islamic militant group Hamas. The report speaks of a dire economic situation in the Palestinian territories.

Special Middle East envoy James Wolfensohn has criticized the U.S. and EU decision to cut off aid to the Hamas-led Palestinian government.

Wolfensohn represents the United States on the Middle East Quartet that also includes Russia, the European Union, and the United Nations.

In his final report before stepping down, Wolfensohn warned that the Palestinian Authority is in danger of collapse. He said the international community has spent $1 billion a year preparing institutions for Palestinian statehood, and now it could all go to waste.

Wolfensohn was to have stepped down at the end of last year, but agreed to stay on for a few months and most recently was involved in helping channel international aid to the Palestinian Authority before the Hamas-led government took power. International restrictions barring him from dealing with the Hamas-led government have effectively made the post irrelevant.

Palestinian analyst Bassam Eid agrees with Wolfensohn's assessment that sanctions against Hamas are counterproductive. "Such kind of, let us call it a boycott, I believe that that will push the region for more and more violence," he said.

Hamas seeks Israel's destruction, and is considered a terrorist organization by the United States and European Union. On Monday, Wolfesohn criticized Hamas for not trying to peacefully resolve issues with Israel.

Israeli spokesman Mark Regev believes the international community has taken an important step in the war on terror, by isolating Hamas. "We are seeing the emerging of a strong international consensus that says an unreformed Hamas is not a partner for political dialogue, and an unreformed Hamas is not a worthy recipient of international aid," he said.

Wolfensohn's report said the situation in the West Bank and Gaza Strip is going "from bad to worse." By 2008, unemployment is expected to reach 47 percent and poverty 74 percent. Wolfensohn warned this would lead to chaos and instability.