HEBRON, West Bank – This flashpoint city, nestled in the West Bank's Judean Mountains, is rarely noted for its bustling economy, neatly paved roads, or sparkling performance center. It is far better known for the nets shopkeepers have stretched above the market streets to keep Jewish settlers from throwing rocks on Palestinian pedestrians, its "apartheid sidewalks," the disputed Ibrahimi Mosque (both a Muslim and Jewish holy site), and the recurring street clashes between Jewish and Arab residents.

And yet, U.S. government funding has led to some small glimmers of economic life for Palestinians here -- gains that may crash to a halt because of a diplomatic feud spurred by the Palestinian bid for statehood at the United Nations.

As with many cities in the West Bank, Hebron's economic vitality centers around the millions in foreign dollars that have poured in, including money from the U.S. Agency for International Development (USAID). An April 2011 World Bank report noted that real economic growth in the West Bank and Gaza reached 9.3 percent of gross domestic product in 2010, exceeding the Palestinian Authority's budget projection of 8 percent -- although the growth was largely "donor-driven."

USAID has been one of those major sources of foreign funds. Since 1994, it has spent $3.4 billion in development funds in the Palestinian territories of West Bank and Gaza, with new roads, water systems, health care facilities, and schools that have served both residents and businesses of cities like Hebron, the largest municipality in the West Bank, with some 189,000 residents.

The money has helped fuel Hebron's recent boom, especially as other economic indicators have improved. The city has doubled the number of building permits issued since 2006, and is preparing to solicit bids for a road to a new $13 million water treatment facility -- financed, of course, by USAID.

"The USAID support is very essential," said Khaled Osaily, Hebron's mayor. "It creates a lot of jobs. The situation here, the infrastructure is very bad. This USAID money stopped a lot of suffering for the people."

But since September -- when Palestinian President Mahmoud Abbas, frustrated with the lack of progress of peace negotiations with Israel, defied the United States and Israel by formally submitting a request to join the United Nations as a full member state -- the flow of U.S. funds has been in jeopardy. The congressional committees responsible for the aid moved quickly to stop it. "Despite decades of assistance totaling billions of dollars, if a Palestinian state were declared today, it would be neither democratic nor peaceful nor willing to negotiate with Israel," Rep. Ileana Ros-Lehtinen (R-FL), chairman of the House Foreign Affairs Committee, said at a congressional hearing to review the funding. "By providing the Palestinians with $2.5 billion over the last five years, the U.S. has only rewarded and reinforced their bad behavior. It raises tough questions as to just what are the tangible benefits for the U.S., or for lasting peace and security between Israel and the Palestinians, derived from decades of assistance provided by the United States taxpayers."

Although the Obama administration opposes Palestinian efforts to seek greater global standing outside of the peace process -- and cut off payments to UNESCO, as required by U.S. law after the organization accepted the Palestinian territories as a full member state in October -- it also rejected the congressional moves to punish the Palestinians. "This money goes to establishing and strengthening the institutions of a future Palestinian state, building a more democratic and stable and secure region," Victoria Nuland, State Department spokeswoman, said in an Oct. 3 briefing with reporters in Washington. "We think it is money that is not only in the interest of the Palestinians; it's in U.S. interest and it's also in Israeli interest, and we would like to see it go forward." The freeze on funds has created a climate of paralyzing uncertainty for the workers employed by USAID, for the agency's partners, for contractors who do business with the NGOs and for a Palestinian government that relies heavily on donors' largesse.

"New schools were built, wells were dug, and judges were trained," said Daoud Kuttab, director general of the non-governmental Community Media Network in the Palestinian territories. "All this positive change ... is threatened to evaporate as the United States Congress decides to punish the Palestinian population for the acts of their political leadership."

On Jan. 16, the Palestinian Authority announced that it would need to raise taxes and cut costs to cover a more than $250 million shortfall in foreign assistance, the majority of which was supposed to come from USAID.

"We're hopeful that the rest of the money will come back, but we're not sure," Ghassan Khatib, spokesman for the Palestinian Authority, told me. "This money is going mainly to development and humanitarian projects. There is no justified reason for holding it. It's important for stabilization."

The Palestinians receive different payouts from different pots of U.S. money, both through USAID and the State Department. Of $187 million in economic assistance from USAID that had been pledged to the Palestinians, Congress is still withholding $147 million from the fiscal year 2011 budget cycle -- $40 million was released in late December. Another $200 million in direct budget support from the State Department to the Palestinian government was paid in two installments; the final $50 million was released in early September after a U.S. congressional delegation returned from visiting the region. Later in the fall, an additional $150 million was released for security assistance through the State Department's Bureau for International Narcotics and Law Enforcement.

"We have to use whatever levels of influence we have to try to get the peace process going," said Rep. Gary Ackerman (D-N.Y.), the ranking member of the House Subcommittee on the Middle East and South Asia. "They're not entitled to other people's money. We're not punishing them. We're trying to encourage them."

U.S. officials have declined to name which projects will be affected, saying only that health service and education projects will feel the biggest pinch. But Osaily, a businessman by training, is understandably worried about how he will keep his city thriving in the coming months without the money. He knows that Hebron will not get all of the pledged assistance it had expected. "If they cut it, all of these projects will be paralyzed," he said. "It's not in the favor of the Palestinians or America or even Israel to do this."

Palestinian businessmen are also wringing their hands as they look for ways to make up lost business revenues, which had been fueled by foreign-funded infrastructure projects.

Nabil Zghier, chief executive of the Royal Industrial Trading Co., which makes plastics in Hebron, said that although he gets no direct foreign assistance, many of his customers do. Zghier said he owes his suppliers $2 million, but his customers, who rely on USAID funding, have not been able to pay him.

"I'm not sure what we're going to do," he said.

Israel initially withheld funds in retaliation for the statehood bid, freezing the monthly transfer of tax funds collected through customs and other fees, but ultimately released the money in late November. It is now pushing the United States to release the remaining USAID funds, under the logic that withholding the funds will only weaken the Palestinian Authority and empower Hamas.

Critics of the Palestinians' reliance on foreign funds argue that the freeze highlights how fragile the Palestinian economy remains, despite Prime Minister Salam Fayyad's much-touted state-building efforts. They also emphasize donor money's negative effects on private Palestinian businesses -- NGOs pay higher wages, for example, making it difficult for private companies to compete for workers.

Sam S. Bahour, a Palestinian-American businessman who lives in the West Bank, said the money was meant mostly to appease Palestinians, offered as a concession because diplomacy has failed to produce an independent state.

"Those donor monies are not coming in to sustain our economy," he said. "Those monies are coming in to sustain a welfare system."

For many Palestinians, who are concerned about the upheaval in the Middle East and the future of their nascent state, this focus on U.S. congressional funding misses the point.

"The question is bigger than the question of money," said Mahdi F. Abdul Hadi, chairman of the Palestinian Academic Society for the Study of International Affairs, an important think-tank in East Jerusalem. "The stake is bigger than the question of funds. Those experiencing poverty, those experiencing misery, they are living in an apartheid system. They have other priorities. The agenda is so big, so complicated, so much more than the people benefiting from the funds."

Hadi said he is confident the United States will restore funding. "This is a political matter, and it's a matter of timing," he said. "They don't want to be out of the arena."

For now, all the residents of Hebron can do is wait for foreign donors to decide their city's economic fate. And, so far, preoccupied with their own fiscal crises or domestic issues, no other countries have stepped in to fill the void. On the al-Haras road, one of the city's main arteries, the King of Falafel restaurant serves fresh pickles, hummus and, of course, falafel -- which, like most everything else in this disputed region, is claimed by both Palestinians and Israelis cuisine as their native cuisine.

On New Year's Day, King of Falafel was busy, with a steady line of customers keeping the falafel-maker busy scooping balls of mashed chickpeas and dropping them into a vat of oil. Two men who gave their names as Khalid and Waleed took long drags on their post-dinner smokes and discussed the loss of USAID funds.

"We have no resources like gold or oil like the other Arab countries," Khalid said. "We really care about the money that comes from the outside. [But] it all depends on politics. We get it if we are 'good.'"

As he spoke, Waleed interrupted, waving his hand. "The American support for us is not free," he said. "We do not ask for it. It's imposed on us. The one who asks for it is the leadership." In other words, Waleed explained, he who asks for the money is ultimately the one who benefits from it.