The World Bank has warned that the Palestinian Authority's budget has become increasingly unsustainable.
The funding shortfall could hit the pay of Palestinian security officers
A report by the Washington-based lender said "uncontained" government spending was to blame for a budget deficit which reached $800m (£451m) in 2005.
The bank's comments come as militant group Hamas prepares to take control of the Palestinian Authority following parliamentary elections last week.
Its poll victory has raised fears over future donor funding of the authority.
The United States and European Union have both threatened to cut off funding if Hamas does not renounce violence and recognise Israel.
On Wednesday, Israel said it would withhold $55m in tax and customs duty payments to the Palestinian Authority because of Hamas's victory.
The World Bank said the authority's prospects for economic recovery were being held back because previous promises by Palestinian officials to implement reforms were not being carried out.
Population: 3.6 million
GDP per person: $934
Foreign aid per person: $469
Change in GDP per person since 1999: -38%
Poverty rate: 48%
Unemployment rate: 27%
Source: World Bank
The bank said it had withheld a $60m payment from a multidonor reform fund in December because of the lack of progress.
Of the Palestinian Authority's $800m budget deficit, some $340m was supported by international donors in the form of direct budget funding.
"Unless addressed promptly, deficits of this magnitude will compromise the proposals of rapid recovery by destabilising the Palestinian Authority's operations and by reducing the public and private resources otherwise available for productive investment," the World Bank said.
Officials from both sides met in Ramallah on Wednesday to discuss budget aid to the authority.
Separately, Saudi Arabia and Qatar pledged $33m in immediate aid to the Palestinian Authority to ease the cash crisis.
About 137,000 civil servants - including 60,000 security officers - are currently on the authority's payroll, and were due to receive their salaries on Thursday.