The World Bank has said Palestinian Authority's budget position has become increasingly unsustainable because of uncontained spending.
In an update of the Authority's fiscal position released today, the Bank cited in particular sharp increases in salaries and hiring.
The Bank also said it had withheld a December payment from a multi-donor reform fund because the Palestinians had not fulfilled reform goals.
Israel earlier decided to suspend millions of euro in monthly payments it makes to the Authority following the victory of the militant Islamist group, Hamas, in last week's parliamentary elections.
A spokesperson for the Israeli Prime Minister's office said it would not transfer funds to a terrorist group.
Hamas has said it is searching for alternative sources of funding.
Earlier, the group rejected a call to disarm from the US President, George W Bush.
In his State of the Union address last night, Mr Bush called on Hamas to recognise Israel, disarm, reject terrorism and work for lasting peace.
Mr Bush said democratisation across the region was the only way to replace the 'dark vision of hatred and fear' perpetrated by terrorists.
But a Hamas leader in Gaza, Sami Abu Zuhri, claimed the resistance was 'legitimate self-defence in the face of aggression'.
Mr Bush also renewed his call for a fundamental change in the policies of Hamas.
Funding for the Palestinian Authority from the EU and the US came into question after Hamas's recent victory in the territory's general election.
Hamas is sworn to Israel's destruction and has carried out nearly 60 suicide bombings since a Palestinian uprising began in 2000.
But the group has largely held to a year-long ceasefire, while pledging to strike back in response to Israeli attacks.
