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Israel pressed to ease Gaza cash crunch

JERUSALEM (Reuters) - Middle East envoy Tony Blair, the International Monetary Fund and the World Bank issued a joint appeal to Israel on Monday to lift restrictions on the transfer of cash to banks in the Hamas-ruled Gaza Strip.

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They said the Israeli restrictions were undermining the Palestinian banking sector, making it harder for Gazans to cover basic needs and weakening the Western-backed government of Palestinian President Mahmoud Abbas.

Israel allowed armoured trucks carrying 100 million shekels (17.2 million pounds) into the impoverished coastal enclave last Thursday to partially ease a severe cash shortage.

But the sum fell far short of the 250 million shekels that Abbas’ government, headed by Prime Minister Salam Fayyad, said was needed to pay its 77,000 workers in the Gaza Strip, which Hamas Islamists seized by force in June 2007 from secular Fatah forces loyal to Abbas.

In a letter to Israeli Prime Minister Ehud Olmert, Blair, IMF Managing Director Dominique Strauss-Kahn and World Bank President Robert Zoellick said current restrictions on the regular entry of shekels could boost the role of the black market at the expense of the regulated banking system.

Compounding the problem, Israeli commercial banks have decided to sever ties with their Palestinian counterparts, citing the government’s designation of Gaza as a “hostile” territory following Hamas’ takeover.

“The aggregate and, no doubt, unintended result of these policies is to weaken the institutions of Prime Minister Fayyad’s government in Gaza,” they wrote in the letter, dated December 12 and released on Monday.

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Israel said it was doing its part.

“Israel will continue to act in order to maintain a routine transfer of the required banknotes into the Gaza Strip,” said Mark Regev, Olmert’s spokesman.

Citing a severe shortage of cash, Gaza banks shut their doors earlier this month. Western officials said Fayyad’s inability to pay salaries in the Gaza Strip in full and on time would undercut Abbas in his power struggle with Hamas.

In contrast to Fayyad, Hamas has largely been able to pay salaries to its own workforce in the coastal territory, Palestinian and Western officials say.

Blair represents the Quartet of Middle East mediators -- the United States, the European Union, Russia and the United Nations.

Defence Minister Ehud Barak approved the transfer of the 100 million shekels following a request from Israel’s central bank, which said it did not want to be responsible for the possible collapse of the Palestinian banking system.

Barak’s decision was denounced by some fellow Israeli cabinet ministers, who asserted the cash should be withheld to increase pressure on Hamas to free a captive Israeli soldier.

In addition to banknotes, Israel has tightened restrictions on the flow of goods to the Gaza Strip in a bid to weaken Hamas.

Reporting by Adam Entous; Editing by Katie Nguyen