A committee of British MPs has criticised the decision by the international community to boycott Hamas after it won elections last year.
Hamas leaders are now forging closer links with Iran, say UK MPs
The Commons International Development Committee said the boycott could set back the Middle East peace process and lead to more violence.
It says attempts to isolate Hamas are pushing it closer to Iran.
The main western powers are demanding that Hamas recognise Israel and renounce violence.
Hamas is also being asked to acknowledge all past agreements signed between Israel and the Palestinians.
The militant group still calls for the destruction of Israel in its charter, though it has proposed a long-term truce in return for Israeli withdrawal from land occupied in 1967.
Two years ago the same committee of MPs warned that malnutrition rates in Gaza and places in the West Bank were as bad as parts of sub-Saharan Africa.
Now they say poverty and hardship has worsened, forcing the Hamas-led government to turn to Iran for funding instead.
Although the committee said it was right to place pressure on Hamas to change policies that went against a peace process, it believed it was best achieved through dialogue and engagement rather than isolation.
''The danger of the current approach is that it might push Hamas into a corner which encourages violence,'' it said.
The US President George Bush wants Congress to approve $85million in aid for Palestinian security forces loyal to the moderate Palestinian Authority President Mahmoud Abbas, the head of the Fatah movement.
Last June, the UN special rapporteur John Dugard, said the humanitarian situation in the Palestinian territories had worsened seriously because of the aid boycott.
Speaking after a visit, he said the aid boycott was causing Palestinians to lose faith in the international community.
He described ordinary people in the Palestinian territories as traumatised. Medical services were in short supply, he said, as was food.