TEL AVIV // The Palestinian Authority faces possible financial ruin for defying Israeli and American opposition to its quest to seek statehood recognition from the United Nations.

Israel's finance minister, Yuval Steinitz, has repeatedly threatened in recent weeks that Israel would stop transferring the customs and tax revenue that it collects on the Palestinian Authority's behalf. That US$1.3 billion (Dh4.8bn) in annual fees is critical to the Palestinian Authority, accounting for about two thirds of its revenue.

Furthermore, Israel's Republican and Democratic allies in the US Congress have warned that Washington would cut off aid. The United States is a major donor, this year contributing some $500m to the Ramallah-based administration.

The threats have been made in response to the controversial request last month by Mr Abbas to the United Nations to grant Palestine full UN membership and recognition of its independent statehood. Israel fiercely opposes the bid, which analysts say would further isolate Israel internationally and weaken its hand in future negotiations.

Yesterday, the UK-based newspaper The Independent reported that the US Congress in August already delayed the transfer of nearly $200 million in aid to the Palestinians. The report said the White House is trying to unlock the funds that it views as essential for the creation of a Palestinian state, despite resistance from Congress. The former US president Bill Clinton this month called Congress "the most pro-Israel parliamentary body in the world."

Nabil Shaath, an official in Mr Abbas's Fatah party, said yesterday that he had received "no notification" of the US aid delay.

Experts on the Palestinian economy say Israel is likely to curtail its tax transfers should the US initiate its own financial cutoff.

Such an Israeli move would be a financial blow to the Palestinian Authority. That is because unlike the US aid - which this year includes only $50m to help cover its budget deficit while the rest is mostly for food aid, healthc are and economic reform - the money from Israel is used for items such as paying public sector wages and social benefits.

"If Israel suspends clearance revenue, the risk of a collapse of the Palestinian Authority would be high," said Oussama Kanaan, the International Monetary Fund's mission chief for the West Bank and Gaza, in an interview.

He added that making up for the lost funds would be hard because the Palestinian Authority's "borrowing limit from domestic banks has already been reached and donors are unlikely to come up with such a high amount of emergency aid to offset the suspended revenue."

The Palestinian Authority is already in a fragile financial state. The administration is short more than $300m in donor funding that was expected to cover a $1bn budget deficit. Furthermore, it has already borrowed more than $1bn from banks in the past seven years and has yet to pay some $300m that it owes to private contractors and pension funds. Finally, it has delayed salary payments twice in recent months.

Any further hit is likely to cripple the administration.

"A suspension of Israeli transfers would have a very dramatic and serious impact on the financial situation of the Palestinian Authority," said Jihad Al Wazir, the governor of the Palestine Monetary Authority, in an interview.

Mr Al Wazir said the Palestinian economy is also paying a price for the UN bid. He said at least one "significant" foreign investment deal, involving business figures from the United Arab Emirates, as well as a bank merger have been postponed because of uncertainty over the Israeli response should the UN approve the Palestinian statehood request.

Mr Al Wazir and other Palestinian officials warn that Israel is also likely to be hurt should it halt the tax transfers. They say any delays in paying wages to the Palestinian Authority's staff, which accounts for a fifth of the total workforce in the West Bank and Gaza, could spur widespread strikes and possibly riots.

Delays could also result in a breakdown of security services, whose personnel account for 40 per cent of the total public employees and who are considered key to the American-mediated security cooperation between Israel and the Palestinians in the West Bank.

A similar crisis had already erupted in 2006, when Israel suspended the transfer of tax after Hamas won Palestinian parliamentary elections. According to Mr Al Wazir, the suspension lasted for at least three months and was a key cause for the violent takeover by Hamas of Gaza. Since then, Hamas has ruled Gaza while Fatah has dominated the West Bank.

Mr Al Wazir said he did not know of any Palestinian contingency plan if Israel stopped the transfers.

He added that any shortfall is unlikely to be compensated for by the European Union, another major donor, because of the financial upheavals in many countries in the bloc.

Saudi Arabia - a major donor along with countries such as the United Arab Emirates - and Kuwait last month dispatched $250m to help cover the Palestinian budget deficit. Still, experts say Arab states may be reluctant to pledge more as they face internal pressure to invest more to improve domestic living conditions.