U.N. says Palestinian Authority in 'crisis'

Terje Larsen informs CNN about the state of the Palestinian economy     WEB EXCLUSIVE Jerrold Kessel: Israel inching toward unity

Official warns of dire financial conditions

GAZA CITY (CNN) -- The Palestinian economy suffered a loss of $1.15 billion during the first four months of the latest uprising against Israel and the Palestinian Authority is on the verge of financial collapse, a United Nations official said Tuesday.

"We are now facing a crisis on many levels," said Terje Larsen, the U.N. special coordinator for the Middle East peace process. "The most important issue right now is that if key Palestinian institutions ... collapse because of lack of funding, it will very easily enhance a situation which may be characterized by chaos and anarchy, which would be the greatest threat in my opinion to security for Palestinians and Israelis alike."

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He said the Palestinian Authority was near the point of not being able to pay its workers in Gaza and the West Bank.

"This will undermine its authority and its ability to control the situation," said Larsen. "I think this is probably the most acute crisis now facing the international community. There is an absolutely acute need of assistance to the Palestinian Authority."

Larsen said the revenue losses are the result of confrontations, mobility restrictions and border closures that have occurred since Palestinian-Israeli violence spiraled upward at the end of September.

"Living conditions are also deteriorating. We have a situation where we have 38 percent unemployment and over 30 percent of the population are under the poverty level, earning less than $2 a day," said Larsen.

"This also fuels anger and hatred. People are losing hope in the peace process and also fuels the situation where the security situation, in my opinion, will continue to deteriorate."

The Palestinian Authority is the autonomous Palestinian government that is responsible for education and culture, social welfare, health and tourism in Gaza and the West Bank. It is also responsible for security and justice in those part of the territories where Israel has handed over those duties.

Palestinians must clear corruption problems

Asked about charges of corruption within the Palestinian Authority, Larsen said that "good governance and transparency" will be necessary if the Palestinian Authority is going to raise more funds.

Larsen said he has met with Palestinian Authority President Yasser Arafat, Israeli Prime Minister Ehud Barak and Prime Minister-elect Ariel Sharon in recent days, urging them to resume peace talks and lift closures in effect in Palestinian territories.

"Specifically to Prime Minister Barak and Prime Minister-elect Sharon, I have said that Israel's closure policy has been colossally counterproductive," he said. "It damages Israel's legitimate security interests, and it is particularly damaging to the fabric of the Palestinian economy and society."

Larsen said he had also suggested that Israel resume the transfer of taxes and customs revenues to the Palestinian Authority.

The latest round of violence began on September 28 after Sharon visited an east Jerusalem site sacred to both Jews and Muslims.

Since then, more than 400 people, most of them Palestinians, have been killed in Palestinian-Israeli violence.

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