Friday March 2 9:11 AM ET
Bigger Explosion Looms in Gaza, West Bank-U.S. Envoy

TEL AVIV (Reuters) - A U.S. ambassador said on Friday the Palestinian economy was on the brink of collapse, President Yasser Arafat's administration was starting to disintegrate and there was a risk of ``an even bigger explosion.''

``We are living in difficult times and I fear we are on the brink of a more serious situation,'' said Martin Indyk, Washington's ambassador to Israel.

His assessment, after five months of a Palestinian uprising against Israeli occupation, was similar to one last month by the U.N. envoy to the Palestinian Authority, Terje Roed-Larsen, who warned of the threat of bloodshed and instability unless the Authority's financial situation was improved.

``The volatility of the situation contains within it the very real potential for an even bigger explosion,'' Indyk told a group of Israeli businessmen and foreign diplomats in Tel Aviv.

That could lead to more trouble on Israel's northern border, which could be exploited by the likes of Iraqi President Saddam Hussein, he said.

Israel has faced Palestinian protests since September in the West Bank and Gaza in which more than 400 people, most of them Palestinians, have been killed. The Jewish state has imposed a blockade on the territories, seriously disrupting their economies.

Outlining the problems, Indyk said: ``The Palestinian economy is on the brink of collapse, the Palestinian Authority is beginning to disintegrate. A state of semi-anarchy and gang rule is engulfing the West Bank and Gaza.''

He said both sides should reduce the level of rhetoric.

``The hate that spews forth from official Palestinian organs and stirs up the Palestinian street must be curbed,'' Indyk said.

``Although there is no comparison with the volume of incitement that comes from the Palestinian side, some Israelis need to tone down their rhetoric,'' he added.

The ambassador said Israel faced ``an immensely complicated situation which does not lend itself to simply a resort to force.''

Commenting on remarks this week by Israeli army chief of staff Shaul Mofaz, who suggested Israel's options included reoccupying the West Bank and Gaza, Indyk said putting the army back into urban areas such as Gaza, Hebron and Nablus ``is a very complicated situation that Israel would find itself in.

``I think it is incumbent on Israelis to think with their heads and not just with their hearts,'' he said.

Under peace deals since 1994, Israel has given Palestinians control over about 40 percent of the West Bank and most of the Gaza Strip. Together, the West Bank and Gaza are home to three million Palestinians.

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