The cash-strapped Palestinian Authority may collapse if government employees go without wages for much longer, the World Bank has warned.
Palestinians have protested against the PA's financial meltdown
Palestinian civil servants have not been paid for the last two months after the US and European Union froze donations after Hamas' election win.
A World Bank report has now cautioned that the 165,000 Palestinian staff could simply start downing tools.
The West is demanding that Hamas recognises Israel's right to exist.
Israel has also stopped handing over customs duties to the Palestinian Authority (PA), worth around $60m (£32m) a month, since Hamas came to power in March.
'Cease to function'
The PA's monthly wage bill totals $116m, and it is estimated that 25% of people in the West Bank and Gaza Strip depend upon the money.
The World Bank had already warned in a report last month that the Palestinian economy would dramatically decline unless the PA could once more pay its wages.
But, according to the Bank's latest publication "these [past] projections now appear too rosy".
"If the PA remains unpaid/minimally paid for several months, it may cease to function," the latest report said.
"Civil servants have already begun to withdraw their services in protest and this can be expected to intensify as personnel down tools and look for other ways to subsist."
The World Bank also warned that the education system could be particularly affected.
"Complex structures such as school systems are not machines to be switched on and off at will," the report said.
"A protracted period in which the PA is disabled might result in the unravelling of a dozen years of donor efforts to build the responsible, accountable institutions needed for a future Palestinian state or for continued governance ad interim."
The World Bank added that discipline among PA security staff would also suffer.
"A deteriorating security environment could make it difficult for government, commerce and relief efforts alike to operate properly," it said.
European diplomats accused the US last week of blocking a plan to resume direct financial aid to the Palestinians.
The European Commission had suggested a plan to send funds to the office of the president, bypassing the Hamas-led government.
Under the proposal, money for basic services such as health and education, could go to Mahmoud Abbas' office, who leads the Fatah movement, a rival to Hamas.
The commission's report said the plan might "avert or delay" a collapse of the PA.