"If there is a peace agreement, there'll be a very narrow window of opportunity when there'll be worldwide attention focused on the Palestinians and the effort to get them started in a positive way," Eizenstat told Reuters in an interview.

Israel and the Palestinians are attempting to seal a final peace deal by September.

Eizenstat was in Jerusalem during a two day visit to Israel and the Palestinian Authority.

Eizenstat said it was "critically important" that Palestinians move forward with economic reforms "so that investors will have confidence that they can come in".

Necessary measures include setting up a commercial infrastructure and privatisation strategy for Palestinian industries, shrinking a bloated public sector and developing a more independent judiciary, he said.

"The amount of foreign direct investment is really minimal...and so it's starting from a very low place, but a lot of the building blocks are there," Eizenstat said.

At the same time, "I feel more positive about the economic side of what I've seen in the (Palestinian) territories than I have at any time I have been here", he said.

Eizenstat cited three straight years of economic growth, a slide in unemployment rates from 21 percent in 1997 to a current 12 percent and a jump in bank lending as evidence of a strengthening Palestinian economy.

In addition, the Palestinian Authority has been successful in consolidating most of its accounts under the Ministry of Finance and in improving the transparency of financial institutions.

However, one of the biggest challenges is streamlining the public sector, Eizenstat said. Palestinian legislators estimate that half of local tax revenues are used to bankroll public employees, he said, adding that such expenditures alone could push the Palestinian budget into a deficit of some $25 million.

Jordan must be included in equation

Yet another mission for strengthening regional ties is granting Jordan wider access to markets in Israel, the West Bank and Gaza, Eizenstat said.

"It's unacceptable that Jordan exports only about $50 million to Israel and around the same amount to the West Bank and Gaza while Israel is exporting over $2 billion to the West Bank and Gaza," he said. "Jordan desperately needs export markets." The United States, which has free trade arrangements with Israel and the Palestinians, announced this week the start of free trade talks with Jordan.

The terms of an economic relationship between Israel and the Palestinians should also be spelled out in advance of a peace deal, Eizenstat said. Palestinian trade has been stunted by Israeli restrictions on workers and goods at border crossings as well as on business links with Arab countries.

"The challenge is to start thinking now about what the post-peace agreement economic relationship will be" among the three parties, he said.