Fayyad told reporters here that some 148,000 civil and military employees of the authority will be paid Wednesday only half their salaries due to a funds crunch. "The other half will be paid once we receive external donations", Fayyad said.

He added that the PA has been facing a $30 million deficit every month so far this year, and had a $100 million outstanding deficit from last year.

The authority needs $150 million to pay monthly salaries to its employees.

"We used to borrow from local banks to meet the financial commitments but we have reached a point where we cannot borrow anymore money," Fayyad said. He appealed to the international community to aid the Palestinian Authority.

Fayyad said donors had pledged $970 million for this year's budget, but have only come through with around a third of that — about $330 million. Much of the shortfall comes from Arab countries, he added.

Foreign aid accounts for about a quarter of this year's overall $3.7 billion budget.

Despite the fiscal crunch, he says the Palestinian Authority has sharply reduced its reliance on donor money from the $1.8 billion it received three years ago.

To make matters worse, Israel decided in May not to transfer 300 million shekels ($88 million) in customs and tax revenues it collects on behalf of the PA on goods imported by Palestinians and destined for the Palestinian territories.

Israel cited the reconciliation agreement between Fatah and Hamas as the reason for its decision. Israeli Finance Minister Yuval Steinitz said he is concerned that the revenues might be funneled to "terror elements and used to pay salaries of Hamas' security apparatus."

Meanwhile, Palestinian President Mahmoud Abbas is dispatching two senior officials to Washington for talks with American officials about US efforts to resume peace talks between Israel and the Palestinians.

Saeb Erekat, a member of the PLO's Executive Committee, said that he and the spokesman of the Palestinian presidency, Nabil Abu Rudainah, will hold talks in Washington with US Mideast envoy David Hale.