MPs described suicide bombing as "morally abhorrent"
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A committee of MPs is urging the government and European Union to impose economic sanctions against Israel.
The Commons International Development Committee says Israeli restrictions on Palestinians in the West Bank and Gaza have led to terrible living conditions.
The MPs said they understood Israel's safety fears, and condemned suicide bombings as "morally abhorrent".
But measures such as the West Bank security barrier undermined the chance of a future Palestinian state.
Travel restrictions
The committee spent six months studying the humanitarian situation in the occupied territories.
It said the difficulty of moving goods in an out of the territories, caused by curfews and other travel restrictions, had led to near economic collapse.
The MPs claimed malnutrition in parts of the West Bank and Gaza equalled those of sub-Saharan Africa, while unemployment rates there were a "staggering" 60-70%.
They said that when looking at Israel's approach to security issues "it is hard to avoid the conclusion that there is a deliberate Israeli approach of putting the lives of ordinary Palestinians under stress as part of a strategy to bring the population to heel".
Committee chairman and Conservative MP Tony Baldry said Israeli policy was causing despair among Palestinians, and spawning conditions in which suicide bombers "can easily be recruited".
The MPs said the international community should not shy away from using sanctions to gain "political leverage" over Israeli policies.
Bombers condemned
The report also highlighted the difficulties faced by humanitarian and development organisations in Gaza and the West Bank because of Israeli security constraints.
The committee said donors to such organisations should seek assurances from Israel that infrastructure built for the purpose of development will not be destroyed.
Despite the criticism, the MPs stressed they were sympathetic towards Israeli safety concerns and said that suicide bombing "as well as being morally abhorrent, has been a catastrophic tactic that has done great harm to the Palestinian cause".
They added that the targeting of civilians was "indefensible" and that condemnation of such acts needed to be heard "more widely".
The committee called on Kofi Annan, the secretary-general of the UN, to consider appointing a humanitarian envoy "to ensure occupation is humane".