The World Bank charges that Israel's system of checkpoints, delays in transferring millions of dollars in tax revenue and preventing most exports from Gaza have caused lasting damage to the Palestinian economy.

Tuesday's report said deteriorating water and transport infrastructure were also serious problems, particularly in Gaza.

Israel officials cite security concerns for restrictions.

The report said economic problems were exacerbated by shortfalls in donor aid, forcing the Palestinian Authority to borrow unsustainable amounts from local banks to stay afloat.

The report said the small Palestinian economy has slowly unraveled over nearly 20 years, with exports falling from 10 percent of the economy in 1994 to just 7 percent today, one of the world's lowest levels.

The report was issued ahead of a donors meeting in Brussels on March 19.