In response to an economic crisis gripping the West Bank, Israel has suddenly increased the number of permits for Palestinians to work inside Israel.

At a time of double-digit unemployment, many Palestinian workers have few other options.

Israeli authorities have granted an additional 10,000 permits this year to work in Israel, raising the total number to 40,000.

It's still well below the peak level of 200,000 in the 1990s, but the most since a violent Palestinian uprising erupted in late 2000.

The uprising was characterised by suicide bombings and other attacks carried out by West Bank Palestinians, prompting Israel to revoke most permits.

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A Palestinian worker fills up empty cigarettes manually with locally grown tobacco in a small factory in the town of Ya'bad near the West Bank city of Jenin. (Abed Omar Qusini/Reuters)

An additional 25,000 Palestinians work in Israeli settlements in the West Bank, underscoring their dependence on the Israeli economy.

But Israel's permits may only help to a certain extent, warned analyst Nasser Abed Kareem.

"Unless Israel lifts the constraints over borders and resources and allows for more freedom of Palestinians to move within the West Bank and between the West Bank and Gaza and connect with the rest of the world, I don't think that the Palestinian economy will sustain [itself]," he said.

Israel continues to control 60 per cent of the West Bank, constraining Palestinian growth and development.

Israeli security policies also limit Palestinians' ability to import and export. However, Israel has taken steps to ease movement in and out of the territory.

United Nations figures show unemployment in the West Bank is 17 per cent, a figure that may well under-represent the severity of the crisis, given the large numbers of underemployed in the West Bank.

The tough times have fuelled an angry mood among Palestinians.

Last month, in a rare move, thousands demonstrated against Prime Minister Salam Fayyad, blaming the U.S.-educated economist for their deepening impoverishment.

The Western-backed Palestinian Authority, the local autonomy government, has paid only partial salaries to its 114,000 civil servants in the West Bank, about 15 per cent of the local work force, over the past few months because of a shortfall in its $4 billion US budget.

Public sector salaries delayed

The public sector is by far the biggest employer in the West Bank, forming the backbone of the Palestinian economy, so the government's inability to pay has rippled throughout the economy.

October's salaries haven't arrived yet, and the government has further angered Palestinians by announcing plans to fix the minimum wage at $345 US a month, a sum lower than the poverty line.

Taxes and prices for basic goods have also risen.

The crisis has several causes. The Palestinian Authority is heavily dependent on foreign donors, and key backers, including the U.S. and Arab countries, haven't delivered promised aid.

Israel has taken steps, such as removing military checkpoints, to ease movement in and out of the territory, but the World Bank and others say it must do more.

On the Palestinian side, attempts by Fayyad to increase taxes have been met with fierce resistance.

In a report to donors last month, the World Bank appealed to donors to urgently to prop up the Palestinian government.

"But even with this financial support, sustainable economic growth cannot be achieved without a removal of the barriers preventing private sector development," it warned.

It's a far cry from Fayyad's grand vision, unveiled in 2009, which aimed to end Palestinian dependency on Israel and lay the foundation for independence.

Fayyad, a former International Monetary Fund official, unveiled a plan which promised new roads, schools, an airport and other development projects. The money would come from donors and increasing tax revenues.

The goal was to generate employment in the West Bank, the heartland of a future Palestinian state, ending the need for labourers to find work in Israel.

To stop Palestinians from inadvertently supporting Israel's settlement enterprise, his government banned the sale of items produced there.

He also tried to halt Palestinian labourers working in settlements, especially construction jobs building new homes. Palestinians say the settlements are preventing them from building their state by cutting up the West Bank.

Despite Fayyad's best intentions, investors shied away, deterred by a deadlocked peace process, a global economic slowdown and region-wide turmoil.

Alternative efforts by Palestinians leaders to unilaterally carve out independence through international recognition are making little progress.

Yet Israel has a strong interest in keeping Fayyad's government afloat.

The Palestinian Authority's collapse would wreak chaos on Israel's doorstep and endanger key security cooperation which has helped maintain years of calm.

In a separate report to donors last month, Israeli officials outlined a series of measures to bolster the Palestinian economy, including increasing work permits.