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RAMALLAH, West Bank--Israel's decision to withhold $130 million a month in revenue collected on behalf of the Palestinians is strangling the economy and leaving the banking system dangerously exposed, the Palestinian central bank governor said on Wednesday.

Israel stopped the transfer of revenues from tax and customs duties in January in protest at the Palestinians' move to join the International Criminal Court from April 1, when war crimes charges may be filed against Israel. Since then, more than $500 million has been withheld from the economy, prompting the Palestinian Authority, which administers the West Bank, to cut most of its employees' salaries by 40 percent and resort to an emergency budget.

The government is also in danger of not being able to service its outstanding loans, according to the governor of the Palestinian Monetary Authority, the central bank.

"We have informed the Palestinian Authority that we have reached the limits permitted to them, or are about to get there, and that banks will not be able to continue to fund it," Governor Jihad al-Wazir told Reuters. "The situation in general is very tough. Suspending the tax transfers is leading to a rapid economic deterioration."

It is not the first time Israel has suspended the transfers - it took similar steps in 2006, 2007 and 2008 - but the risks this time may be greater and leave the economy ever more dependent on handouts from international donors, who have not followed through on commitments in recent months.

With the deficit already at around 15 percent of GDP and the tax transfers accounting for two-thirds of income, the budget is falling into a deeper hole every month. Unemployment stands at 25 percent and output is set to contract this year, sharply increasing the threat of instability and violence.

"The situation could become untenable, with a growing risk of social unrest and strikes that could lead to political instability," the IMF said in a report at the end of January. "These serious risks could be mitigated if Israel quickly resumed transfers of clearance revenue and donors front-loaded their aid."

The Israeli military has warned the government that the revenue withholdings are fuelling violence in the West Bank. There is a chance Israel will resume the payments as soon as a new government is in place although it has given no indication that it will do so. Prime Minister Benjamin Netanyahu was formally asked to form a coalition on Wednesday and is expected to have a new government ready in weeks.

But with the Palestinians showing no signs of backing away from the ICC, Netanyahu may decide to keep up the pressure. U.S. Congressional funding to the Palestinians may also be cut in the event that war crimes charges are brought against Israel.

One diplomat tracking the state of play estimated that if the Palestinian Authority does not receive any transfers by June, its finances would collapse.