Gaza's economic growth has halted, World Bank says

· Israeli blockade strangling territory, report warns
· Olmert spokesman denies expansion of settlements

• Toni O'Loughlin in Jerusalem
• The Guardian,

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This article appeared in the Guardian on Monday April 28 2008 on p16 of the International section. It was last updated at 00:00 on April 28 2008.

Gaza's economic growth has ground to a halt and will continue to shrink unless Israel lifts its economic blockade on the beleaguered Palestinian territory, a new World Bank report says. After three years of warning that Palestinian businesses were on the brink of collapse, the World Bank yesterday reported that Gaza's economy had recorded zero growth in 2007.

The report comes 10 months after Israel imposed tough economic sanctions to break Hamas's control of Gaza, after the Islamist militants ousted their political rivals, Fatah, in bloody clashes last year.

It also warns that the West Bank, which is administered by the US-backed Palestinian Authority, will struggle to grow, despite the international community's pledge to inject $7.7bn (£3.9bn), over the next three years to bolster the economy.

Inspired by US-brokered peace talks at Annapolis last year, the international community gave generously, in the belief that Israel would halt further construction in the 149 Jewish settlements and approximately 110 outposts, and ease the barriers, checkpoints, permits and other military decrees that exclude Palestinians from about 1,000 miles of roads and much of the West Bank.

But instead, movement restrictions remain the biggest obstacle to growth in the West Bank, the World Bank says. "Since Annapolis, settlement activity has continued largely unabated and, in the case of the Jerusalem area, has even accelerated. Of the 885 settlement housing units tendered in 2007, 747 were issued in the five weeks after Annapolis," the report says.

The World Bank says Israel has legitimate security concerns, but its control of movement in the West Bank is not solely to protect settlers, but also to help expand settlements. "Some 38% of the West Bank has been confiscated for current or future settlements and outposts and their growth, as well as closed military areas."

Israel claims it is reining in settlement growth. "There's no policy to expand settlements," said Mark Regev, spokesman for the prime minister, Ehud Olmert. "We are building inside existing settlements."

"We understand the importance of movement and access for the Palestinians and support those goals, but we can't ignore serious threats to the security of Israeli citizens. There are hard-core terrorist cells, Hamas, Islamic Jihad and renegade Fatah members, in the West Bank."

The World Bank modelling suggests that the Palestinian economy as a whole could achieve double-digit growth, but that given the stalemate in peace negotiations, is more likely to grow by just 3% in 2008. Even then individual incomes are likely to fall, as population growth is expected to outstrip economic activity.

At the weekend, the prospect of an economic revival in the West Bank continued to wither, with the Palestinian president, Mahmoud Abbas, saying he had walked away from a meeting with President George Bush "almost empty handed".