The study suggests Palestinians could generate an extra £1bn ($1.5bn) a year if restrictions to their use of land, water and movements were removed.

It says Palestinians can use only 6% of the land, while settlers control 86%.

Israel criticised the report, saying it had "a clearly political agenda".

About 500,000 Jews live in more than 100 settlements built since Israel's 1967 occupation of the West Bank and East Jerusalem. The settlements are considered illegal under international law, though Israel disputes this.

Oxfam says about 66,000 Palestinians and 9,500 settlers live in the area. Most of the Palestinians live in 20 permanent communities, including the city of Jericho, though thousands live in temporary communities.

The Israeli human rights organisation B'Tselem say the authorities have instituted a system of permits and restrictions on the movement of Palestinians in the Jordan Valley, making it difficult for those who are not listed as residents to enter it. Israel says the measures are necessary for its security.

At the same time, the group says, Israel has allocated almost exclusive use of the valley's water resources to the 28 Jewish settlements in the area, to the detriment of Palestinian communities.

'Wretched reality'

In the report On the Brink: The Impact of Settlements on Palestinians in the Jordan Valley, Oxfam says settlement expansion and restrictions on Palestinians are destroying the viability of a future Palestinian state.

"The Jordan Valley... has the potential to be the Palestinian bread basket, yet restrictions on Palestinians use of land, water, and on building in the valley are keeping them poor while helping nearby Israeli settlements thrive," it adds.

"By one estimate, the Palestinian economy could gain an additional $1bn a year in agricultural revenue if the restrictions on Palestinian use of land, water, and mobility in the Jordan Valley were removed."

The report states that Palestinians can use only 6% of the land in the area, while settlers, who account for 13% of the population, have control over 86% of its land. The poverty rate for Palestinian communities in the Jordan Valley is nearly double that of the rest of the West Bank, it adds.

"Settlements and related Israeli policies, such as systematic demolitions and restrictions on land and water use, are creating a wretched reality for Palestinians in the Jordan Valley," said Oxfam International Executive Director Jeremy Hobbs.

The report calls on Israel's largest trading partner and the biggest donor to the Palestinians, the European Union and its member states, to take urgent action to press the government of Israel to immediately stop building settlements and end the demolition of Palestinian structures.

Oxfam also calls on the international community, donors and non-governmental organisations to initiate and support development projects in the Jordan Valley "even if they have not been approved by the Israeli Civilian Administration (unless Israeli refusal is based on genuine security concerns that are legitimate under international law)".

A spokesman for the Israeli embassy in London, Amir Ofek, said: "Oxfam's latest report on the situation in the Palestinian territories puts a clearly political agenda above any humanitarian concern."

"Its call to the international community and to NGOs to initiate projects which clearly violate existing agreements is irresponsible and inflammatory. Far from advancing peace, such an approach undermines the prospects of reaching a negotiated resolution to the conflict."