Israeli military alarmed by standoff over West Bank funds, report says

JERUSALEM (Reuters) - The Israeli military has warned the government its policy of cutting off funds to the Palestinian Authority could push the occupied West Bank into a third "intifada", public broadcaster Kan Radio reported on Thursday.

The warning, as the war in Gaza approaches the start of its ninth month, underlined the increasingly dire state of the West Bank economy where hundreds of thousands of workers have lost their jobs in Israel and public servants have been unpaid or on partial pay for months.

The West Bank, home to 2.8 million Palestinians and 670,000 Israeli settlers, is under Israeli military occupation with the internationally recognised Palestinian Authority exercising limited self rule.

Israel has blocked Palestinian workers from entering from the West Bank since the Hamas militant group that controls the Gaza Strip attacked Israeli territory on Oct. 7 precipitating the war in Gaza.

According to estimates from the Palestinian finance ministry, Israel has been holding back a total of around 6 billion shekels ($1.61 billion) in tax revenues, adding to a broad financial squeeze that has resulted in growing hardship as donor funds have dried up.

Nasr Abdul Karim, an economist from the Arab American University in Ramallah, said the Palestinian Authority had been able to make up some of the shortfall by taking out private loans, but that was unlikely to be possible in the long term.

"This month that was an option, will it be an option next month, or the one after?" he said.

Even before the Gaza war, rising violence had drawn fears of a third intifada, the name given to the uprisings that shook Israel and the West Bank in the 1980s and early 2000s.

The tensions caused by the financial clampdown risked turning the West Bank from a secondary theatre in the war into a core theatre, Kan Radio quoted a memorandum from the military as saying.

The army has become increasingly alarmed as economic hardship has fed into violence that has surged across the West Bank, with hundreds of Palestinians, including armed fighters as well as stone-throwing youths and uninvolved civilians, killed in clashes with security forces.

Violent raids on Palestinian villages by groups of Israeli settlers have become commonplace, and more than a dozen Israelis have been killed in attacks by Palestinians in the West Bank and East Jerusalem.

Asked about the report, the military referred Reuters to the Shin Bet security service, which declined to comment. A Defence Ministry spokesperson said she had no knowledge of the document. But an Israeli official who requested anonymity confirmed the existence of the memorandum, saying it was circulated among various government ministries, military and security agencies "more than a week ago".

The Palestinian Authority, the body set up three decades ago under the Oslo interim peace accords, has been engaged in a bitter standoff for months with Israel's hard-right Finance Minister Bezalel Smotrich, who has refused to release tax revenues, accusing the PA of supporting Israel's enemy Hamas.

Badeea Al-Dwaik, an employee at the Ministry of Labour, said public sector workers were already receiving no more than 70-80% of their pay even before the Oct. 7 attacks.

"After Oct 7, they started giving us 50%," he said. "It is hard to make ends meet with such a salary, there are a lot of employees who have debts."

Kan Radio cited the memorandum, prepared by officials from the military and Shin Bet, as saying the squeeze on incomes was likely to push many Palestinians towards armed militant groups backed by cash from Iran.

It recommended a series of measures, including opening up more crossing points between Israel and the West Bank to allow Palestinian citizens of Israel easier weekend access to go shopping, and testing supervised entry to Israel for a limited number of Palestinian labourers.

Palestinian Government spokesperson Mohammad Abu Al-Rub said tax revenue which Israel has withheld from the Palestinian Authority accounted for 70% of general budget revenues, describing it as part of a general campaign against Palestinians in both the West Bank and Gaza.

"There is a heavy financial siege that Israel is imposing on the Palestinians and its leadership, just as is the case with the war on Gaza," he said.

($1 = 3.7245 shekels)

(Additional reporting by Dan Williams and Ali Sawafta; Writing by James Mackenzie)