* Israeli movement restriction blamed
* Foreign aid flows also dropped
GENEVA, Sept 5 (Reuters) - The United Nations UNCTAD agency issued a gloomy outlook for the Palestinian economy on Wednesday, arguing that tougher Israeli policies and settlement expansion were pushing the occupied territories and Gaza deeper into poverty.
The situation had been aggravated in 2011 by a sharp drop in foreign aid, which for years provided a vital support, dimming any hope for an upswing even in the longer term, a report from the trade and development body said.
"(Israeli) restrictions on movement, faltering aid flows, a paralysed private sector and a chronic fiscal crisis cloud the horizons," UNCTAD declared. Amid persistent high unemployment, it added, "one in two Palestinians is classified as poor."
The report, for an UNCTAD meeting in Geneva later this month, said the impact of the Israeli occupation since 1968 on the productive base of the Palestinian economy, and especially its once-flourishing agriculture, "has been devastating."
"The economy has lost access to 40 per cent of West Bank land, 82 percent of its ground water, and more than two thirds of its grazing land," it said.
In Gaza, under a long-time land-and-sea blockade by Israel, 85 percent of fishery resources were inaccessible.
UNCTAD said the 9.9 percent overall growth across the West Bank and Gaza, itself ruled by the Islamic Hamas, had been driven by reconstruction after the Israeli army operation there at the end of 2008 and the beginning of 2009.
Israel says that that operation, which was marked by widespread destruction in the coastal strip region, was launched to halt rocket attacks by Islamist militants on Israeli villages north of the border.
In 2011, according to the UNCTAD report, Gaza's tiny economy grew by 23 percent while the larger West Bank saw growth of 5.2 percent. "But this was driven by rebuilding of what was there, and is not sustainable," agency official Mahmoud Elkhafif told reporters.
REAL WAGE DECLINE
Real gross domestic product in Gaza was still 10 pct below its 2005 level, and the year's overall expansion - from the low base of 2010 - was accompanied by a decline in real wages and in labour productivity across the Palestinian territories.
The low base, the report said, was also the result of Israeli closures on the West Bank where Israel had also increased the number of its barriers to movement of Palestinian people and goods from 500 in 2010 to 523 in 2011.
The 2011 growth also had no impact on unemployment, which remained around 26 pct of the work force.
The UNCTAD comment was underpinned by another statement from the U.N.'s International Labour Organisation (ILO) - which put the jobless rate at 21 pct - following the suicide in Gaza at the weekend of an unemployed youth.
"The situation of workers in Gaza is one of the worst in the region and the world," Nada al-Nashif, ILO's regional director for the Arab states, said in a statement.
The UNCTAD report said that across Palestinian areas there was "continued severe poverty and chronic food insecurity." On the West Bank, food insecurity affected 66 percent of the population and more in Gaza.
In still largely Arab-populated but Israeli-administered eastern Jerusalem, the poverty rate was estimated to be 78 percent, even higher than anywhere in the West Bank or Gaza, the U.N. agency added. [For a feature on the Palestinian economy, click on ID:nL6E8K1290] (Reported by Robert Evans; Editing by Susan Fenton)