World Bank warns of deepening Palestinian fiscal crisis RAMALLAH, West Bank (Reuters) - A fiscal crisis in the aid-dependent Palestinian economy will worsen unless foreign funding increases and Israel eases its restrictions in the occupied West Bank, the World Bank said on Wednesday. "Donors do need to act urgently in the face of a serious fiscal crisis facing the PA (Palestinian Authority) in the short term," Mariam Sherman, the World Bank's country director for the West Bank and Gaza Strip, said in a statement. In a report issued ahead of a conference on Palestinian aid in New York next week, the World Bank forecast a $1.5 billion deficit in the PA budget in 2012. It said only $1.14 billion in donor funding to cover the gap had been received. The PA, which exercises limited self-rule in the West Bank, receives most of its aid from the United States, the European Union and Arab nations. But over the past several years there has been a shortfall in aid coming from Arab states resulting in the PA being unable to pay salaries to its 153,000 civil servants on time, on several occasions this year. A hike in taxes in early September caused by economic accords with Israel that peg Palestinian sales tax to high Israeli rates sparked demonstrations in West Bank cities and calls for the government to resign. To appease the crowds and end protests, Prime Minister Salam Fayyad announced a rolling back of the tax increases. The report said the presence of Israeli settlements, which control some 42 percent of West Bank territory, was stifling the potential for Palestinian economic growth. To build their economy, the World Bank said, the Palestinians need access to "Area C," the territory covering 60 percent of the West Bank where Israel maintains full control under interim peace accords and most settlements are located. Area C includes most of, but not all, the settlements. "The continuous growth in the size of land that is allocated for settlement activity within the West Bank has fragmented the territory into smaller and more disconnected enclaves," the report said. The United Nations deems all settlements in the West Bank to be illegal. Israel disputes this and has sanctioned 120 official settlements since capturing the West Bank in a 1967 Middle East war. In the report, the World Bank forecast that Gross Domestic Product growth in the West Bank and the Gaza Strip would slow to 5.6 percent in 2012 from 5.9 percent last year. Sherman said that even if donor countries met their aid pledges, "sustainable economic growth cannot be achieved without the removal of the barriers preventing private sector development, particularly in Area C." The World Bank said the PA had made "credible efforts," towards tackling its crisis and building its institutions but Israeli measures "remain the major impediment." Sherman cited difficulties in obtaining Israeli entry permits to the West Bank for foreign investors, a ban on the import of "dual use" items that Israel fears could be used in weaponry and limits on access to natural resources. "The most important message of this report is that economic cohesion is not achievable when the areas in which people have to operate and go about their business are crisscrossed by impediments," Sherman said. The report said Israel has recently shown a willingness to consider the relaxation of specific restrictions in Area C, and had, according to its Foreign Ministry, approved 119 Palestinian infrastructure projects in 2011. Israel has said it has greatly eased the movement of people and goods in the West Bank, as a result of improved security conditions. It maintains a blockade of the Gaza Strip, whose rulers oppose the existence of the Jewish state. Editing by Jeffrey Heller; Editing by Jon Boyle