By Mohammed Assadi

RAMALLAH, West Bank, Oct 3 (Reuters) - The Palestinian bank regulator said on Wednesday some Palestinian banks could be forced to shut their Gaza branches by year-end due to Israel's financial clampdown on the Hamas-controlled territory.

The governor of the Palestine Monetary Authority, George Abed, said Gaza's supply of shekels, the Israeli currency, could begin to run out starting next month and that individual Gazans could have trouble receiving funds from family members abroad.

In an interview with Reuters, Abed said the 42 bank branches operating in the Gaza Strip were struggling due to the territory's economic deterioration, steep declines in imports and exports, and limitations on the supply of shekels used for day-to-day transactions.

Abed said the decision of Israel's largest commercial bank, Bank Hapoalim <POLI.TA>, to sever ties with financial institutions in the Gaza Strip would exacerbate these problems unless alternatives are found quickly.

"There is a risk that several branches could close down before the end of the year if this continues," the former International Monetary Fund official said, adding additional branches could close later if the problems continue.

WAGES

With U.S. backing, Israel has sought to tighten its financial hold on the Gaza Strip since Hamas Islamists routed Palestinian President Mahmoud Abbas's secular Fatah forces in June. Israel has branded Gaza an "enemy entity", fuelling Hapoalim's decision to sever long-standing banking links.

The U.S.-led campaign is meant to isolate Hamas and bolster Abbas and the Western-backed government he appointed in the occupied West Bank after Gaza's takeover.

Hapoalim's decision is due to take effect on Oct. 23. Israeli regulators say Israel Discount Bank <DSCT.TA> is expected to follow suit, threatening Gaza's money supply and Abbas's ability to pay public sector wages in the future.

"The situation is already very precarious, very difficult. Further pressure will make the situation more difficult and we think it would come to a humanitarian crisis by the end of the year if we continue on this track,"Abed said.

Abed said the Palestine Monetary Authority, which functions like a central bank, had advised banks based in Gaza to set up parallel operations in the West Bank in case Gaza becomes financially inaccessible.

"This is being done ... I think it can be accomplished to protect our banking operations from being completely shut down."

Abed said he was holding talks with Israel's central bank and finance ministry to "see what can be done" to maintain Gaza's money supply.

Abed said he expected the supply of shekels in Gaza to be limited by Israel to funding government salaries and humanitarian supplies, further restricting business activity in the impoverished territory of 1.5 million Palestinians.

But Abed said he was hopeful a solution would be found before Gaza's shekels completely run out, citing Israel's decision to back Abbas's government.

Some Palestinian banks are already experiencing some liquidity problems.

Abed said a real cash crunch could begin in as little as a month or two unless an alternative supply of shekels is found.

"If Hapoalim implements this decision and if Discount follows..., then banks cannot settle their shekel checks any more, cannot transfer money to and from Gaza," Abed said.

He said that would force Gaza importers and businesses to conduct all of their transactions in cash, accelerating the speed at which cash stocks would be depleted.

Israel's clampdown could also prevent ordinary Palestinians from receiving remittances -- financial funds from family members abroad. Palestinians increasingly rely on such support.

"It will stop all banking and ultimately trading operations and will definitely have a major adverse impact on the Gaza economy," Abed said.

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