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JERUSALEM, May 2: International envoy James Wolfensohn, in his final report to West Asia mediators after stepping down, sharply questioned the decision of Western powers to cut off aid to the Hamas-led Palestinian government.

Having spent more than $1 billion a year on assistance to the Palestinians, much of it to build government institutions and an economy needed to create a ''viable Palestinian state,'' the report asked: ''Will we now simply abandon these goals?'' The special envoy's report, a copy of which was obtained by Reuters today, said the United Nations and nongovernmental organizations will not be able to fill the void if Palestinian Authority institutions collapse under Western pressure.

The so-called Quartet of international powers mediating in the West Asia is made up of the United States, European Union, Russia and the United Nations.

''It would surprise me if one could win by getting all the kids out of school or starving the Palestinians. And I don't think anyone in the Quartet believes that to be the policy,'' Wolfensohn told a news conference in Washington yesterday with U.S. Secretary of State Condoleezza Rice.

''I think that's a losing gambit,'' the former World Bank president added.

Wolfensohn officially stepped down as the Quartet's special envoy on April 30 because of restrictions on his role now that Islamic militant group Hamas is in control of the Palestinian Authority, aides said.

Israel's elder statesman, Shimon Peres, told Israel Radio that Wolfensohn could not function as an envoy because of Hamas. ''It was impossible to clap with one hand,'' said Peres.

The United States and the EU have cut off direct financial support for the Authority, which has been unable to receive funds from abroad because local, regional and international banks fear sanctions by the United States, which regards Hamas as a terrorist organization.

Rice said the United States was accelerating efforts to get humanitarian help to the Palestinian people and hoped Hamas would agree to the ''minimum conditions for engagement'' laid out by the Quartet, she said.

''If those political conditions can come into place, then perhaps we can move forward,'' said Rice.

Wolfensohn's report said recent pledges of aid from Arab states would, at best, provide temporary relief to the Hamas-led government, which has so far been unable to secure the 130 million dollar in funding needed each month to maintain operations.

''FROM BAD TO WORSE'' While some donor nations have promised to increase humanitarian assistance to offset cuts in direct assistance to the Palestinian Authority, the report said: ''Neither the U.N. nor the NGOs many of the donors are looking toward have the capacity to fulfill these roles.'' Wolfensohn's office said the Palestinian Authority's inability to pay salaries was already having an impact on the economy. ''The fiscal situation of the PA has gone from bad to worse,'' the report said.

By 2008, under this scenario, unemployment would reach 47 per cent and poverty 74 percent. The World Bank estimates that real growth per capita will decline by 27 percent in 2006 alone.

''Actions to reduce the deficit are simply unavoidable and the drastic financial shortfall will undoubtedly force more aggressive action by the PA in the near future,'' it said.

The Quartet appointed Wolfensohn a year ago to help coordinate Israel's withdrawal from the Gaza Strip and to spearhead rebuilding efforts there.

His final report acknowledged little benefit has come from a deal brokered last year by Rice to boost the flow of goods into and out of Gaza after Israel's withdrawal from the strip.

The report said the Karni goods crossing has been closed 50 per cent of the days it was scheduled to operate. Export volumes have averaged just 23 truckloads per day, far short of the 150 truckloads per day called for in the agreement.

Reuters