The West Bank's economy is suffering from precarious lack of investment, largely because of Israeli restrictions on movement and despite increased international aid, the World Bank said on Thurday.
The 48-page report comes nearly a year after Israel and the Palestinians formally relaunched peace talks at a conference in the United States with the goal of resolving their decades-old conflict by the end of 2008.
It also comes less than a year after international donors pledged more than seven billion dollars over three years to aid the creation of a Palestinian state.
Foreign aid, the World Bank said, "has succeeded in doing little more than slowing down the deterioration of the economy, despite ever larger volumes."
Palestinian per capita gross domestic product in 2007 was 40 percent lower than its peak in 1999, the report said, citing the last year before the outbreak of the Palestinian uprising in 2000.
Investment "dropped to precariously low levels," with public investment having virtually ceased over the past two years and private investment remaining stagnant after dropping 15 percent between 2005 and 2006, the report said.
The World Bank painted a gloomy picture of the situation in the Israeli-occupied territory, which it said was "fragmented into a multitude of enclaves, with a regime of movement restrictions between them."
"The physical access restrictions are the most visible, with 38 percent of the land area reserved by the government of Israel to serve settlements and security objectives."
The restrictions have deepened as the population of Jewish settlers in the West Bank and mostly Arab east Jerusalem has grown by a rate of 3.44 percent in the past four years, reaching an estimated 461,000 people.
The more than 100 settlements that dot the territory are considered illegal under international law and are viewed as a major obstacle to the peace process.
The report also pointed to increasing settler violence in the territory, including the destruction of trees, homes, and infrastructure, which it said had created a "permanent state of insecurity" that deterred investment.
A recent spate of attacks by settlers in the West Bank prompted Israeli Defence Minister Ehud Barak to lash out this week at what he said were "thugs" who interfere with the annual Palestinian olive harvest.
The report said farmers are also been hard hit by the rigidly enforced movement and access restrictions in the West Bank's Area C, which is under full Israeli military control.
"The increasing number of walls, roadblocks, and checkpoints has made it increasingly difficult for farmers to access their lands and markets," it said.
The restrictions have raised the cost of transporting goods and importing agricultural supplies, while "produce destined for external markets frequently spoils as it is detained at checkpoints," the report said.
Meanwhile, industrial development is hampered by limited access to land and water, as well as the difficulty in obtaining permits to build in Area C.
The report also pointed out the environmental impact of the restrictions on access, including creeping desertification caused by overgrazing in the limited area accessible to Palestinian herders.
It added that the "lack of suitable site access for solid waste disposal causes the use of 'wildcat' disposal sites close or inside the cities and villages, a practice that carries serious environmental and health dangers."
The World Bank also urged the Palestinian Authority to improve its land management performance, "most importantly land use and development planning and public land allocation."
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