* Gaza Strip economy set to shrink as much as 15 percent
* But post-war reconstruction could spur growth
* Palestinian economy has grown for past seven years
By Jeffrey Heller
JERUSALEM, Sept 16 (Reuters) - War in Gaza will contribute to a reversal of seven years of growth in the Palestinian economy, now expected to shrink by nearly four percent this year, the World Bank said in a report on Tuesday.
The Gaza Strip - run by the Hamas Islamist group that is shunned by the West - will see contraction of as much as 15 percent, while a slight recovery in the fourth quarter could push West Bank growth to about 0.5 percent, the World Bank said.
The report said the downturn was a result of the 50-day war between Israeli forces and militants in Gaza, restrictions on the flow of goods into the enclave by Israel and Egypt and a drop in foreign aid to the Palestinian Authority (PA).
Rebuilding Gaza after the conflict, in which whole neighbourhoods and vital infrastructure were flattened, will cost $7.8 billion, the PA estimated this month.
"The conflict and humanitarian tragedy in Gaza has made an already struggling Palestinian economy worse and put further stress on the fiscal situation of the Palestinian Authority (PA)," the report said.
Egypt will host a donors' conference on Oct. 12 with the aim of raising reconstruction funds, and donor nations to the PA, which exercises limited self-rule in the Palestinian Territories, are due to convene on the sidelines of the U.N. General Assembly next week.
"The lack of a comprehensive peace agreement leads to a vicious cycle of economic decline and conflict," the report said of efforts to clinch a deal on Palestinian statehood in the occupied West Bank and the Gaza Strip that collapsed in April.
Growth, spurred largely by international donor funds, has been decelerating since 2012 and slowed to less than two percent in 2013 but could rebound strongly in 2015 if Gaza reconstruction gets under way, the bank said.
Its report, issued three weeks after a truce, said a strong world response to rebuilding needs could ultimately spur economic growth, helping it to top four percent in 2015, with Gaza growing by 11 percent if goods do flow into the territory.
Even without additional spending resulting from the war, the PA would face a financing gap - due in part to a fall in donor aid of about $350 million this year, the World Bank said.
A sustainable Palestinian economic future depended on international budget support for the PA and "sincere efforts" by Israel "to allow better and faster movement of people of goods", while taking into account its "legitimate security concerns".
While restrictions on Palestinians' mobility in the West Bank have been eased, Israel still effectively blocks exports from Gaza, territory Hamas seized from forces loyal to Western-backed Palestinian president Mahmoud Abbas in 2007, the bank said.
Neighbouring Egypt's destruction of smuggling tunnels under the border that had been a conduit for commercial goods, as well as weapons, had also hit the enclave of 1.8 million people hard, it said. (Editing by Louise Ireland)
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