The Hamas-led Palestinian Authority will collapse in poverty and insecurity if it continues to be starved of foreign aid, the World Bank has warned.
In a new report, it says failing to resume aid could ‘disable’ the Authority and set back efforts to build a Palestinian state by ‘a dozen years’.
The US and EU have frozen donations to the Palestinians, demanding Hamas drops calls for the destruction of Israel.
The warning comes as the US, UN, EU and Russia are to hold talks on the crisis.
The Middle East Quartet will meet in New York on Tuesday to look at ways of trying to resolve the crisis.
Many Palestinian government workers have not been paid since March.
There are food and petrol shortages in Gaza, whose borders are entirely controlled by Israel.
The World Bank, which has helped funnel donor aid to the Palestinians, said the failure to pay salaries could lead to a breakdown of discipline in the security forces and the civil service, eventually paralysing the government.
The bank said a report it had issued in March, warning of a dramatic rise in Palestinian poverty and unemployment, now appeared to have been optimistic.
Hamas took office earlier this year after winning a huge majority in elections to the Palestinian parliament.
'Serious instability'
When the Quartet meets on Tuesday, the four members will have to decide whether they can afford to leave the Palestinian aid situation as it is, says the BBC's Middle East analyst Roger Hardy.
The Europeans are broadly in favour of establishing a trust fund that would pay Palestinian salaries - and bypass the Hamas-led government.
The US, however, favours a tougher approach, depriving Hamas of economic aid and diplomatic contact until it recognises Israel and renounces violence.
The official view in Washington is that if Hamas refuses to recognise Israel, and eventually collapses, it will have no-one to blame but itself.
But, our correspondent says, many in Europe feel that wielding the big stick against Hamas will be counter-productive, and that it is in no-one's interests for Gaza and the West Bank to descend ever deeper into poverty and lawlessness.
The World Bank - which will also attend Tuesday's meeting - has now warned that unless an agreed funding mechanism is found quickly, serious instability is inevitable.
PA FINANCIAL CRISIS
$116m: PA's monthly wage bill
PA employs 165,000 people
25% of people in West Bank and Gaza depend on PA wages