The reluctance of banks to risk US sanctions and lawsuits by dealing with a Hamas-led government has pushed the Palestinian Authority to the brink of financial collapse sooner than donors had expected.
The rapid onset of a banking crisis - within days of Hamas's swearing-in on March 29th - could further depress Palestinian incomes, fuel political unrest and speed the arrival of a humanitarian crisis, according to diplomats and Palestinian officials.
Western diplomats and private-sector experts said Hamas's troubles finding a bank has for now eclipsed Western aid cuts as the biggest immediate threat to the new government's viability.
Western diplomat
"This is by far the biggest crisis facing the Palestinian Authority and the Palestinian economy. It could have profound long-term consequences," said Gidi Grinstein, president of the Reut Institute, an independent Israeli think tank.
Hamas cabinet members and other Palestinian officials have accused the Bush administration of sparking the crisis by pressuring Amman-based Arab Bank to stop managing the Palestinian Authority's main treasury account.
Diplomats and Palestinian officials said the account was effectively shut down, jeopardising Hamas's ability to carry out basic functions such as securing foreign aid and paying vendors.
"Even if you get emergency money together, there's no way to bring it in," without banks to make the transfers and hold the money, said a Western diplomat.
Hamas is already more than a week late paying March salaries to 140,000 Palestinian Authority workers, and it was unclear when the government will be able to secure the funds to meet payroll.
In addition to pressuring the Arab Bank, "the Americans informed (other) Palestinian banks that if they deal with the Hamas government they could risk legal and political measures against them," a senior Palestinian official said.
The Arab Bank sent a letter to the US Treasury Department shortly after Hamas won January's parliamentary election, seeking assurances it would not face US penalties under the Patriot Act and other anti-terrorism laws if it continued to manage the so-called "single treasury account", diplomats said.