The Palestinian economy is heading for a further slowdown in growth and a spike in unemployment just as it faces a “high risk” of continuing social unrest, according to the International Monetary Fund.

The conclusions of the most recent IMF fact-finding mission make alarming reading both for Palestinian leaders and western governments amid growing concern over the viability of the Palestinian Authority and with peace talks with Israel frozen.

The past weeks have seen a sharp rise in social unrest across the West Bank, with demonstrators taking to the streets to protest against fuel price hikes, tax increases and a broader decline in living conditions. Salam Fayyad, the western-backed prime minister of the Palestinian Authority, has been the main target of protester anger and has faced calls for his resignation.

Oussama Kanaan, IMF mission chief for the West Bank and Gaza, said the PA’s problems stemmed largely from the continuing curbs on Palestinian trade imposed by Israel and by the sharp fall in donor money, especially from the Arab world. “The PA is viable, because the institutions are there. The capacity to manage the budget is there. The two things required now are for the Palestinians to have better access to external markets and – for a transitional period – more aid.”

Mr Kanaan added that the PA had made “enormous progress” over recent years but its standing among Palestinians was falling, not least because of its recent difficulties in paying public sector salaries on time. “The PA has managed to reduce its deficit tremendously . . . but it needs more money [from donors],” he said.

In an attempt to defuse tensions, Mr Fayyad announced last week that he would revoke some of the latest austerity measures imposed by his government. Suggesting that Israel, too, is concerned about a possible collapse of the PA, the government of Benjamin Netanyahu decided last week to transfer $64m in tax revenues, which it collects on behalf of the PA, ahead of schedule.

According to the IMF mission, whose findings will be reflected in a forthcoming report to donor countries, growth in the West Bank and Gaza has slowed sharply since the beginning of last year. After averaging 9 per cent between 2008 and 2010, economic growth in the West Bank slowed to 5 per cent last year and in the first quarter of 2012. Unemployment rose from 16 per cent in the first half of last year to 19 per cent in the same period in 2012.

The slowdown has been even more pronounced in Gaza, which is ruled by the Islamist Hamas movement. After an unusual spike in economic growth in 2010-2011, when output rose by 20 per cent, growth fell back to 6 per cent in the first quarter of 2012. Unemployment also rose slightly, and now stands as 30 per cent.

The IMF mission says the cash-starved PA has been forced to borrow increasing amounts from domestic banks over the past year to cover its funding shortfall. The PA’s debt to Palestinian banks rose from $500m in 2008 to $1.2bn in June this year – a sum that is equivalent to 99 per cent of the banks’ equity or 12 per cent of gross domestic product.

The slowdown in growth and a sharp fall in donor funding have further undermined the PA’s already-stretched finances. According to the IMF, the authority has a funding gap of $400m this year, which will make it difficult to make “essential payments, including for wages” to public sector workers.