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The World Bank warned Tuesday that the Palestinian economy faces a "bleak" outlook as Israel continues its blockade of the Gaza Strip and has increased restrictions on the occupied West Bank.

In a new report, the global lender commended efforts by the Palestinian Authority (PA) to slim its public wage bill but said the economies of the Gaza Strip and West Bank remain heavily dependent on foreign donor support and hindered by Israeli restrictions.

Israeli-imposed "restrictions on movement and access in the West Bank and the restrictions resulting in near-blockade in Gaza remain among the most important obstacles to growth and private sector development in the Palestinian territories", the report said.

"If not eased or lifted, the Palestinian economy is expected to continue operating well below its potential," it added.

Israel routinely withholds tax revenues from the West Bank-based PA, claiming to do so in response to the Authority's payments to the families of Palestinians killed by Israeli forces or during attacks on Israelis.

Under past peace accords, Israel collects taxes and customs revenues on the PA's behalf.

In January, Israel's far-right Finance Minister Bezalel Smotrich said Israel would withhold around $40 million of revenues in response to the PA successfully lobbying for a UN General Assembly vote referring Israel's occupation of Palestinian territories to the International Court of Justice.

Some observers expressed fears of radical Israeli policy changes in the West Bank under Israeli Prime Minister Benjamin Netanyahu's new government, formed in December.

The World Bank report warned that "decisions by the newly elected Israeli government to double the monthly deductions from clearance revenues... could signal a discouraging trend going forward."

Further highlighting the West Bank's economic dependence on Israel, the report noted some 22.5 percent of Palestinians in the territory work in Israel or Israeli settlements in the West Bank.

Overall around one in four people in Gaza and the West Bank are unemployed.

Outside "sources of risks, such as in the areas of food and energy prices, mean the overall economic outlook remains bleak", Stefan Emblad, the World Bank's country director for the Palestinian territories, said in the report.

The bank's assessment coincided with another report Tuesday by UN Middle East peace envoy Tor Wennesland, warning that without an immediate "strategic shift" there could be a "serious reversal in the Palestinian state-building project".