The U.N. agency for trade and development says the Palestinians are facing their worst economic crisis. UNCTAD notes prolonged curfews and closures imposed by Israel to halt suicide bombings have crippled the Palestinian economy.

UNCTAD says the ongoing crisis in the Palestinian territories has eroded the benefits of past development efforts undertaken there. It adds the Palestinian economy is shrinking because the area's natural resources, institutions, and human capacity to sustain development are rapidly deteriorating.

Raja Khalidi, who directs UNCTAD's Palestinian program, points out that was not always the case. The Palestinian economy was growing just before the current Palestinian uprising began in September 2000.

"At the end of 1998, 1999, the potential for the economy to continuously, year after year, produce positive result was demonstrated," he said. "But it was a very short period. It has happened before and there have been in the past similar cyclical downturns. This time, the cyclical downturn is so severe that that capacity, and that potential, seems to have been very much wiped out."

UNCTAD's Khalidi says the Palestinian national income has lost more than $3 billion in less than two years because of the violence and the military confrontation.

One-third of the Palestinian labor force, about 200,000 people, is unemployed. More than half of the Palestinian population lives on less than two dollars a day.

Mr. Khalidi says the Palestinian Authority is bankrupt and exists on aid from Arab and European countries. But he notes the authority has improved its financial management.

"Now any money that is coming in is being vetted even before it is being made available," he said. "But its allocation is being very strictly and carefully followed by a variety of donor agencies and of course, the Palestinian Authority itself, which is very aware of the sensitivity of its use of other people's money."

Mr. Khalidi says economic recovery for the Palestinians will depend on moves towards peace and security. He adds the Palestinian economy will continue to require humanitarian assistance.

But he says that Palestinians may need to re-examine their tight trade links with Israel and set up independent ways to generate revenue and collect taxes.