The bank said the finances of the Palestinian Authority, which governs the West Bank, have been hurt by reduced donor funding; higher-than-expected spending on pensions and loans; and a revenue shortfall sparked by an economic slowdown, primarily in the Hamas-run Gaza Strip.
In a new report, the bank concluded that sustainable Palestinian economic growth requires strong private sector investment. But it warned that such development is hampered badly because Israel bars Palestinians from 60% of the West Bank.
Much of the West Bank's farmland and land reserves are located in that territory, which remains under full Israeli control.
"Donors do need to act urgently in the face of a serious fiscal crisis facing the PA in the short term," said Mariam Sherman, World Bank Country director for the West Bank and Gaza.
"But even with this financial support, sustainable economic growth cannot be achieved without a removal of the barriers preventing private sector development," she added.
'Worst crisis in 18 years'
Donors, including the US and some Arab states, have not met their funding pledges to the Palestinian Authority, which relies on that money to pay salaries to 150,000 civil servants who gobble up half of the government's nearly $4 billion budget. But even if they do, the pledges will still fall $400 million short of what the PA would need to close its budget gap, the World Bank said.
Economists say the cash crisis is the worst in the Palestinian Authority's 18-year existence and threatens to set off a chain reaction of business failures, layoffs and economic downturn.
Some warn that the Palestinian Authority, key to negotiating and implementing any future peace deal with Israel, will not survive without a major infusion of cash.