Efforts to create a Palestinian state could collapse unless emergency funds are found to bail out its nascent government, the Palestinian finance minister said.

The Palestinian Authority faces a $400 million shortfall this year and has already been hit by protests over the spiralling cost of living and spending cuts by president Mahmud Abbas's administration.

"The two state solution is in jeopardy if the PA is not able to continue to function and prepare for the two state solution," Palestinian finance minister Nabil Kassis said after a meeting of donor nations at the UN headquarters.

"This could be very soon," Kassis told reporters calling for urgent action by donors who have not yet kept finance promises.

Without giving a timeframe for how long the Palestinian Authority can survive without help, he said: "This should come sooner than later, late would be too late."

The minister said there were $300 million dollars of pledges unpaid. Some of this has been blocked by the US Congress.

An economic crisis gripping the Palestinian territories has exacerbated growing frustration over deadlock in the peace process. There have been no talks between the two sides for two years, with Palestinians refusing to negotiate while Israel continues with its settlement of the occupied territories.

The World Bank and International Monetary Fund have estimated a $400 million cash shortage which could get worse by the end of the year.

The World Bank has predicted the Palestinian Authority may be forced to extend arrears already owed in pensions and cut basic spending such as wages "which could have severe social impacts."

Norway's Foreign Minister Espen Barth Eide said that the crisis was caused by Israel's restrictions on the economy in the West Bank as well slower growth and smaller donor payments.

Israel has paid more than $110 million in advanced fees on VAT returns in the past two months, an Israeli official said. Israel is "very concerned" about the crisis, said Irit Ben-Abba of the Israeli foreign ministry.

But the Norwegian minister said Israel should ease restrictions on access to water, land, raw materials and export markets. The Palestinian economic crisis is "dire and getting worse," he said.

[Image via Agence France-Presse]