Former British Prime Minister Tony Blair and the heads of the International Monetary Fund and World Bank urged Israel's prime minister to ease Israeli pressure on the Palestinian banking system.

"We understand and appreciate Israel's legitimate security concerns," said Mr. Blair, who is now a Mideast negotiator, IMF Managing Director Dominique Strauss-Kahn and World Bank President Robert Zoellick in a letter to Israeli Prime Minister Ehud Olmert. But the three argued that Israel policies "undermine the viability of the Palestinian banking sector as a whole, greatly inhibit Palestinian-Israeli trade and divert resources away from the banking system toward unregulated informal channels."

Additionally cash constraints in Gaza are "bound to seriously affect" the ability of Gazans "to cover basic needs," the letter said.

At issue is a tug-of-war over cash transfers from Israel to Gaza. Gaza's economy runs on shekels, the currency of Israel. In recent months, Israel has blocked the shipment of shekel bills into Gaza, saying the money winds up in the hands of Hamas, which controls the coastal strip and is considered by Israel and the U.S. to be a terrorist group.

Recently, Israel approved a cash shipment of 100 million shekels ($25.5 million) into Gaza, averting for the time being a banking crisis in the Palestinian territories. Without the necessary cash, Palestinian bankers feared a run on their banks.

Israeli banks, fearful of being sued for abetting terrorist financing, are also looking to end their banking relationship with Palestinian banks. If that were to occur, Palestinian banks would have a tough time handling payments from abroad.

As a result of the Israeli restrictions, "confidence in the formal banking sector (in Gaza) has been severely reduced," the three official argued. Those policies also have the effect of "favoring the emergence of a black market that is providing this liquidity at considerable premiums and through unregulated channels." Palestinian banking officials say that Gaza's southern border with Egypt is honeycombed with tunnels run by smugglers who bring in dollars and goods. Some of the tunnel operators provide make loans to Gaza residents.

The Israeli policies undermine Palestinian authorities on the West Bank who try to police against money laundering and terrorist financing in Gaza and the West Bank, the three said. "Thus, we seek the assistance and intervention of the Israeli authorities in resolving these matters expeditiously," the letter said. The West Bank is under the control of the Fatah party.

The Israeli government has been split on the banking issue, with Defense ministry officials arguing that squeezing the banks in Gaza will weaken Hamas, while finance and economic officials contend that the policies actually increase the Hamas's power.