JERUSALEM (Reuters) - Israel is preventing the Western-backed Palestinian Authority from transferring cash to the Gaza Strip to pay its workers and others hard-hit by war, Western and Palestinian officials said on Wednesday.

The restrictions threatened to undercut the ability of President Mahmoud Abbas’s West Bank-based government to reassert a presence in the Hamas-ruled territory after Israel’s 22-day offensive, said the officials, who asked not to be identified.

The cash restrictions also underscored the wider hurdles facing reconstruction, estimated to cost more than $2 billion, in the Gaza Strip, where 1.5 million Palestinians live.

Israel has told the United Nations and other aid groups planning for the rebuilding they must apply for project-by-project Israeli approval and provide guarantees none of the work will benefit Hamas.

Israel had no immediate comment on why the Palestinian Authority’s post-war cash shipments were being blocked. The restrictions were put in place long before fighting broke out on December 27, with Israel arguing that Gaza had enough cash in circulation and that some of the money could end up with Hamas.

Middle East envoy Tony Blair, the International Monetary Fund and the World Bank countered that the restrictions were crippling Gaza’s economy and undermining the Palestinian Authority, which adopted anti-money laundering rules to prevent any of the money from going to Hamas and other groups.

It is unclear how Gaza’s reconstruction will be handled. “It’s a Pandora’s box,” one senior diplomat said, citing the restrictions imposed by Israel and the international community.

Western powers consider Hamas a “terrorist” organization and refuse to transfer money directly to the group or its government in the Gaza Strip. But the Palestinian Authority has had little presence in the coastal territory since Hamas routed Abbas’s secular Fatah faction and seized control in June 2007.

Reconstruction largely hinges on convincing Israel to lift restrictions on imports of cash and building materials, like steel and cement. Israel has long argued that such imports can be used by the Islamist group to rearm.

“The Gaza Strip was almost destroyed and it needs everything,” said Nabil al-Zaeem, head of the Palestinian Commercial Service Co., one of Gaza’s largest cement importers.

He said rebuilding will not happen “if things did not change regarding the flow of cement and other construction materials.”

CASH REQUEST

Abbas’s government, headed by Prime Minister Salam Fayyad, has asked Israel for permission to send more than $80 million to the Gaza Strip. That includes 243 million Israeli shekels ($62 million), the tender used in the Palestinian territories.

The shipment would cover salary payments to some 77,000 Palestinian Authority workers in Gaza who report to Fayyad, as well as pension and welfare payments for retirees and the poor. Much of the money comes from the European Union.

Of the money requested, Western officials said Israel has so far allowed in only some $10 million for the U.N. Relief and Works Agency (UNRWA). Several of the agency’s facilities in the Gaza Strip were bombed by Israel during the fighting.

“So far we haven’t seen any change in the approach of the Israeli authorities. But the needs are much more dire now,” Palestine Monetary Authority Governor Jihad Wazir told Reuters.

Alix de Mauny, a spokeswoman for the European Commission office for the West Bank and Gaza Strip, confirmed that Israel has yet to allow the transfer of the cash to the Gaza Strip.

“Recovery and reconstruction of Gaza will be deeply hampered without the opening of the crossings to humanitarian and commercial goods, as well as cash,” she said.