The Palestinian economy is not yet strong enough to support a sovereign state and officials need to lower costs and increase efficiency, the World Bank said in a report on Wednesday.

"The Palestinian Authority (PA) has made steady progress in many years towards establishing the institutions required by a future state but the economy is currently not strong enough to support such a state," economist John Nasir said in a statement accompanying the report.

"Economic sustainability cannot be based on foreign aid so it is critical for the PA to increase trade and spur private sector growth," he added.

The PA says it is facing its worst financial crisis since it was founded in 1994, with debts of $1.5 billion (1.2 billion euros) and an immediate cash shortfall of $500 million (411 million euros).

Saudi Arabia last week pledged an emergency $100-million (82-million euro) donation after Palestinian president Mahmud Abbas visited the kingdom and appealed for help.

"While the Palestinian Authority has had considerable success in building the institutions of a future state, it has made less progress in developing a sustainable economic base," said the 181-page report.

"The Government of Israel’s security restrictions continue to stymie investment and the recent growth has largely been driven by donor aid. This situation is unsustainable and aid levels have already begun to fall."

Attempts to negotiate an end to Israel's 45-year occupation and establish an independent Palestinian state in the West Bank and Gaza Strip, with its capital in east Jerusalem, ground to a halt in September 2010 after the expiry of temporary restrictions on settlement building, which Israel refused to renew.

Exploratory contacts between the sides in Jordan in January 2012 failed to secure agreement on new direct talks.

"Barring a political solution to the conflict, there is little that can be done about these constraints," said the World Bank report.

"However, there are a number of areas where the PA can focus its attention to not only improve current performance, but to lay the groundwork for a future state," it said.

"A future Palestinian state should seek to emulate Asian countries that have managed to sustain high levels of economic growth by adopting an outward orientation and integrating into world supply chains."