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RAMALLAH, West Bank (Reuters) - The Western-backed Palestinian Authority will roll back tax increases, Prime Minister Salam Fayyad said on Tuesday, in a U-turn aimed at ending protests that have swept the West Bank, but a union leader rejected the concession.
The protests are also being eyed with growing concern by Israel, which fears the frustration against the Palestinian leadership could turn into a third, full-blown uprising against the Israeli occupation of the West Bank.
Israeli Prime Minister Benjamin Netanyahu responded with a pledge to "make efforts to help the Palestinian Authority overcome this crisis" and said the treasury would make an early transfer of 250 million shekels ($63.3 million) in taxes levied on Palestinians.
Thousands of youths attacked a police station in the city of Hebron on Monday night, calling for the dismissal of Fayyad who is struggling to keep finances afloat in the face of a slowdown in foreign donor aid and continued Israeli trade restrictions.
In 2011 the Palestinians were promised $1.1 billion in aid and received only $750 million.
Government employees, many of whom will receive only part of their August salaries because of the government's cash crisis, also staged a strike on Tuesday and hundreds of them picketed a government cabinet meeting.
"We're doing the best we can, and we have been all along," Fayyad said after saying that his government would scrap much of planned hikes in fuel and diesel levies announced last week.
"I hope that the Palestinian citizen could look at this situation, in light of the unique hardships we face, and will find it sufficient. It represents the maximum, most intensive effort to get to a solution."
The move cancelled most, but not all of the fuel price rises of about 5 percent implemented at the beginning of this month, a decision along with a VAT hike which helped trigger the unrest.
Israel's promised infusion of money was made up of an advance on taxes and duties the Jewish state collects and normally transfers back to the Palestinians. It has often delayed these payments over conflict in the past.
Out of cash and bound by economic accords that peg its sales tax to steep Israeli rates, the Palestinian Authority is struggling to salvage its legitimacy in the eyes of the public, and officials have blamed Israel for its economic woes.
Fayyad said the shortfall would be made up by cutting high-end government salaries and scaling back some ministries' work, but that only donor aid could pay the bills in the short term, pending greater economic independence for the Palestinians.
"There are clear limits to what the Palestinian Authority can achieve economically given the context of Israeli restrictions it experiences," he said.
The head of the Palestinian public transport union promptly rejected the move and promised more street protests, saying fuel prices even before the recent hike were beyond people's means.
"These decisions are unsatisfactory, and we will continue in our protests," Jawad Omran told Reuters.
Palestinians mostly save their outrage for Israel, which has occupied the West Bank for 45 years, and even some of the protesters were surprised by the intensity of Monday's violence, in which more than 50 people were reported injured.
Fayyad has been a focal point of the protests. Demonstrators in Hebron pelted a giant poster of him with shoes on Monday and chants throughout the West Bank described him as "a collaborator with the Americans" and called for his resignation.
Islamist movement Hamas, which holds sway in the isolated Gaza Strip and is fiercely opposed to President Mahmoud Abbas and his prime minister Fayyad, has a strong following in Hebron.
Abbas initially welcomed the protests when they started last week, equating them with the Arab Spring uprisings and pinning the blame firmly on Israel for the economic turbulence.
But the president afterwards voiced support for his embattled prime minister, perhaps realizing that if the unrest escalates, it could undermine his own position. He has gained little popular support from his policy of seeking a negotiated peace settlement with Israel.
U.N. agencies put youth unemployment at more than 40 percent, and the high costs, with neither statehood nor economic improvement in sight, may drive Palestinians to try to upend the Palestinian Authority (PA) itself, and that might lead to Israel becoming involved, political observers said.
The PA "is not capable of seriously providing solutions. Its sovereignty and access to resources is limited," said Bassem Zubeideh, a political analyst at Birzeit university in the West Bank.
"If the youth movement is strong enough to challenge the economic and political pillars it represents, it could lead to a showdown with Israel, which would consider any change in the current regime as a negative change," he said.
When the Arab Spring first rippled across the Middle East last year, the Palestinian Territories remained quiet. Locals said there was no appetite for confrontation after decades of largely fruitless rebellion against Israel.
Additional reporting by Jihan Abdalla; Editing by Crispian Balmer and Louise Ireland