Israel's central bank has proposed using a state-owned institution to supply funds to Gaza banks after private lenders began severing ties to the Strip after Israel declared it "hostile territory," officials said on Wednesday.

The anemic Gaza economy depends on Israeli shekels, long provided by Israeli commercial banks with a green light from the Israeli government, to finance imports, pay Palestinian Authority workers and carry out day-to-day transactions...

...Abbas' government in the West Bank uses shekels to pay salaries to tens of thousands of its employees in the Gaza Strip.

It is unclear whether the Bank of Israel's proposal to have the state-owned Israel Postal Bank take over Gaza transactions for the private banks will win Israeli government approval.

Israel declared the Hamas-controlled Gaza Strip an "enemy entity" last Wednesday and said it would reduce its fuel and power supplies to the territory in response to rocket attacks by Palestinian militants.

It has yet to carry out any cuts and pledged to keep humanitarian aid flowing.

"How can you do business with an enemy entity? There are a lot of questions nobody thought about when they made the decision," said a senior Israeli official involved in the matter...