The Palestinian economy would expand by more than a third if Israeli restrictions on movement, land access and water use are lifted in the majority of the occupied West Bank that remains under full Israeli control, a World Bank report has said.

The report warned of a “bleak” future if Israel did not relinquish its economic strictures in what is known as area C, which comprises 61 per cent of the West Bank, but it also said Palestinians would have to address Israeli security concerns there.

“More than half the land in the West Bank, much of it agriculture and resource rich is inaccessible to the Palestinians,” the report said. “Without the ability to conduct purposeful economic activity in area C, the economic space of the West Bank will remain crowded and stunted, inhabited by people whose daily interactions with the state of Israel are characterised by inconvenience, expense and frustration.”

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The report, which was welcomed by Palestinians, but criticised by Israel’s foreign ministry, comes two weeks after Tony Blair, in his capacity as envoy of the Middle East peacemaking quartet, unveiled at the United Nations plans for a major effort to boost the Palestinian private sector including in construction, housing, and agriculture. Mr Blair said success would depend among other things on Israel’s implementing “large scale easing measures”.

While the World Bank said there has been some easing of movement and access restrictions in recent years, it stressed that they still “fragment” the West Bank and cause major economic damage. At the end of 2012, sixty Palestinian communities were still compelled to use detours that are 2 to 5 times longer than the direct route to the closest city, the report said. Israel has said the restrictions are needed to prevent Palestinian attacks, but Palestinians charge that they constitute economic warfare. The report said movement of people and goods “is severely limited by a multi-layered system of physical, institutional and administrative impediments. Physical barriers are compounded by unpredictable regulatory measures and practices.”

The report added that Palestinian agriculture is stymied by Israeli restrictions on accessing land and on water use and would undergo a major transformation if curbs were lifted. It cited the formidable output of Israeli settlements in date and pomegranate production, noting most Palestinian cultivation is still of olives due to their relatively low water requirement.

The report said that minerals from the Dead Sea, including potash and bromide, could become a major boon for the Palestinian economy as they have for Jordan and Israel and that Palestinians could also open hotels on the Dead Sea shore.

“The total potential value added for alleviating today’s restrictions on the access to and activity and production in area C is likely to amount to $3.4bn or thirty five per cent of Palestinian GDP in 2011,” the report said. It estimated that Palestinian unemployment would shrink by more than a third if the strictures were eased and that the need for foreign donor support would be reduced.

Israeli foreign ministry spokesman Paul Hirschson criticised the report as “incomplete and partial”.

“It ignores the global economic situation, violence in Palestinian society and the fact that Israel has spoken of the need to nurture the Palestinian economy, including area C, and has done so.” he said. Mr Hirschson said that issues in the report would be discussed in the peace negotiations that resumed in July

Samir Abdallah, director of the Ramallah based Palestinian Economic Policy Research Institute, praised the report as being “an objective assessment”.

“I’m sure lifting restrictions in area C will have a meaningful and dramatic impact on the growth of the Palestinian economy,” he said.

He did not rule out that Mr Blair’s efforts could produce some results. “Our experience with Tony Blair is that he promises, but that his delivery has not been impressive. Now he’s backed by this plan and the Americans so this time let’s wait and see.”