(Adds Hamas reaction, background)

JERUSALEM, Oct 10 (Reuters) - A second Israeli bank said on Wednesday it was severing business ties with Palestinian banks in the Hamas-run Gaza Strip.

Israel Discount Bank said in a statement it would "stop all transactions with affiliated banks in the Gaza Strip and with other bank branches located there" following Israel's designation of Gaza as an "enemy entity" last month.

Discount is Israel's third-biggest bank. The biggest, Bank Hapoalim, cut off ties with Gazan banks on Sept. 25.

Israeli currency is used by Palestinian President Mahmoud Abbas's government in the West Bank to pay salaries to tens of thousands of employees in the Gaza Strip, home to 1.5 million people and taken over by Hamas Islamist fighters in June.

Hamas spokesman Taher al-Nono called Discount's decision "another Israeli attempt to harden the siege on the people of Gaza and the Palestinian people".

"The government will carefully study the new decision and the consequences that may result from it both on the government and on the citizens," Nono said.

New shekels are also needed in Gaza to replace those leaving the territory to pay for imports, mainly from Israeli suppliers.

The Israeli sanctions come in response to short-range Palestinian rocket fire from Gaza. Israel has also threatened to reduce its fuel and power supplies to Gaza, though it has yet to carry out any cuts and pledged to keep humanitarian aid flowing.

By formally defining Gaza as hostile, Israel could argue that it cannot be bound by international law to supply utilities and services to the territory.

U.N. officials have challenged that contention.

Israel withdrew troops and settlers in 2005 from the Gaza Strip but Palestinians say it is still occupied because Israel controls its air, land and sea borders.

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