RAMALLAH (Reuters) -- The Palestinian Authority announced on Sunday it was suspending plans to raise income tax that have sparked widespread protests but said it was still seeking ways to cut costs in 2012 to plug a gap resulting from lower-than-expected foreign aid revenues.

Prime Minister Salam Fayyad said earlier this month that the Palestinian Authority was planning to double the income tax rate to 30 percent as part of efforts to cut the budget deficit to $750 million in 2012, from $1.1 billion a year earlier.

"He (Fayyad) will ask the ministerial council at its next meeting on Tuesday to suspend collection of tax advances set on the basis of the new tax bracket," Fayyad's office said in a statement.

Fayyad met on Sunday a group of private sector representatives in Ramallah as part of a national dialogue initiative to discuss the economic climate in the Palestinian territories.

Secretary-general of the private sector coordination council Muhammad Masrouji told Ma'an before the meeting that the group has submitted a memo to Fayyad expressing disapproval over recent tax increases.

Fayyad's plans had sparked protests in various parts of the West Bank when he announced plans to double income tax on high earners from 15 percent, while more companies and other entities would have to pay tax on their operations.

Government spending would also be cut and some of the Palestinian Authority's 153,000 public sector workers might be forced into early retirement.

The Authority's growing financial difficulties coincide with a period of political uncertainty, where peace talks with Israel are in limbo and long-running attempts to end a feud between rival factions in the West Bank and Gaza floundering.

Fayyad had promised to stand down to help President Mahmoud Abbas's Fatah movement and its Islamist Hamas rival in Gaza set up a new unity government. But with no agreement in sight, he has proceeded with a 2012 budget estimated at $3.5 billion and warned that sacrifices will be needed.

After running up a $350-million-deficit in 2010, the Palestinian Authority plunged $1.1 billion into the red in 2011.

The Palestinians had planned for foreign aid of about $1 billion in 2011, but Fayyad said just under $750 million had arrived.

Financial support from the United States, the European Union and Arab states allows the PA to pay the salaries of the public workers, including teachers and security forces.

However, the United States abruptly cut off funding last year after Abbas made a bid for recognition of Palestinian statehood at the United Nations.

Officials say more than $150 million of US aid is frozen. The UN statehood bid has ground to a halt, with the Palestinians failing to get enough backing to secure a vote in the Security Council.