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Yellen says travel restrictions on West Bank not in Israel's interest

SAO PAULO, March 1 (Reuters) - U.S. Treasury Secretary Janet Yellen criticized Israel for withholding work permits and blocking travel by Palestinians from the occupied West Bank, saying the measures hurt both sides and risked tipping off a broader regional conflict.

"We don’t want to see an extension of conflict into other parts,” Yellen told Reuters in an interview late on Thursday. "Israel is a friend and we talk to them regularly. If we see something that worries us, we tell our partners what we think of that."

On Tuesday she told reporters she had written to Prime Minister Benjamin Netanyahu to express her concerns and to welcome Israel's agreement to resume tax transfers to the Palestinian Authority.

Israel's economy came to a standstill after gunmen from the Palestinian Islamist group Hamas attacked on Oct. 7, killing 1,200 people and sparking Israeli attacks in Gaza that have killed over 30,000 Palestinians.

Hundreds of thousands were called up from the reserves in one of Israel's largest military mobilizations. Thousands of Palestinian workers were laid off and have not been allowed to return to work.

The World Bank estimates the Palestinian economy shrank by 6.4% last year, reversing a forecast of 3.2% growth due to the war in Gaza and deterioration in the West Bank, a separate Palestinian enclave. The situation in Gaza is far worse, with more than 80% of the housing units destroyed or damaged and 2 million people displaced.

Yellen said Israel's travel and commerce restrictions were hitting the Palestinian economy hard and halting a number of construction projects in Israel by creating a worker shortage.

"My understanding is there are construction sites that have had to shut down because they have insufficient labor, so it’s not good for Israel’s economy, or the West Bank’s economy," she said in the interview. "I don’t think any of this is in Israel’s interest."

The U.S. is also concerned about neighbor Egypt's economy, which has seen hits to revenues from a 55% drop in traffic through the Suez Canal and sharp declines in tourism, Yellen said.

Egypt is close to reaching an agreement with the International Monetary Fund (IMF) that would expand its current $3 billion program, she said, without giving details.

"We’re certainly supportive of the IMF helping Egypt, and its problems have intensified, especially with the situation with the Suez Canal and the Red Sea. It’s driven down their revenues and tourism and things like that," Yellen said.

IMF Managing Director Kristalina Georgieva told Reuters this week key issues with Egyptian authorities had been resolved and the fund should finalize an augmented financing package within weeks. (Reporting by Andrea Shalal; Editing by William Mallard)

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