KUWAIT (Reuters) - Palestinian authorities are aiming to securitize an initial $200 million of some $1.3 billion worth of government debt by the first quarter of 2013 to help reduce state borrowing from local banks, a top banker said on Sunday.

"The Ministry of Finance is much more ready for securitizing the old debt rather than creating new debt, because we are not even rated," Palestinian Monetary Authority Governor Jihad al-Wazir said ahead of a Monday meeting of Arab central bankers in Kuwait.

"This will be only to the primary market, only to the banks, not to the public and not to overseas public," he told reporters.

The Palestinian Monetary Authority (PMA), which oversees operations in both the West Bank - where the Palestinian Authority is based - and the Gaza Strip controlled by the Islamist group Hamas, will manage the securitization on behalf of the Finance Ministry.

"What is important about this is that it will transfer some of the existing debt that is direct borrowing from the government into securities which are tradable between the banks," Wazir said.

"It will add to stability, it will generate an interbank market and additionally as an incentive it will be used as daily collateral in our payment system."

The securitization would likely see the PMA convert a chunk of outstanding Palestinian debt into bonds or other tradeable securities that would then be sold to local banks, in order to cut its direct borrowing requirements.

The Palestinians, a stateless people, do not have their own currency and the Israeli shekel is used for most day-to-day cash transactions.

The PMA, which has reserves of $1 billion, regulates banks operating in the Palestinian territories, occupied by Israel in a 1967 war.

The government budget deficit was likely to be around $1.3 billion this year, up from a $950 million gap projected in the budget, Wazir also said, adding $1.36 billion was a red line for state borrowing from banks.

"The difference is likely to come from donors. There are a number of talks with Arab countries, particularly in the Gulf," he said.

"Also maybe through the World Bank, maybe through the World Bank trust fund. The situation is still in a crisis mode."

In September, the United Nations UNCTAD agency issued a gloomy outlook for the Palestinian economy, arguing that tougher Israeli policies and settlement expansion were pushing the occupied territories and Gaza deeper into poverty.

The situation had been aggravated in 2011 by a sharp drop in foreign aid, which for years provided a vital support, dimming any hope for an upswing even in the longer term, it said.

Wazir said the economy was doing "Ok" under the circumstances with inflation-adjusted gross domestic product seen growing around 5 percent this year, down from over 6 percent in 2011.

"If the Israelis lift restrictions we can grow by 14-15 percent annually for a number of years," he said. (Reporting by Martin Dokoupil and Sylvia Westall; Editing by Sophie Hares)