The European Commission said on Friday it would provide the Palestinian Authority with 400 million euros ($435.5 million) in emergency financial support in the coming two months amid concerns within the EU that the authority could collapse.

The money will be disbursed in the form of grants and loans in three payments between July and September, subject to progress in the implementation of the reform agenda of the Palestinian Authority, the Commission said in a statement.

It had earlier signed a letter of intent with the PA setting out a strategy to address its budgetary and fiscal situation.

"Together, we are laying the groundwork for economic and political stability in the West Bank," European Commission President Ursula von der Leyen said.

The PA's finances have been in disarray for years as donor states have cut back funding that once covered nearly a third of its $6 billion annual budget, demanding reforms to tackle corruption and waste.

But Palestinian officials say the situation has worsened sharply since the militant group Hamas attacked Israel from Gaza on Oct. 7, leading Israel to withhold a chunk of tax revenues it collects on the PA's behalf that are now its main source of financing.

The Palestinian government welcomed the funding, calling it "an important step to contribute to alleviating the stifling financial and economic crisis that our people are going through, which worsened after the Israeli aggression on Gaza".

Basic infrastructure has worsened, government employees are being paid a fraction of their salaries, and health services are collapsing, officials say.

These are signs of a deep financial crisis that has crippled the administration led by President Mahmoud Abbas in the Israeli-occupied West Bank, prompting questions over its future even as the United States and other countries are pressing for a "revitalised" PA to run the Gaza Strip when fighting there ends.

"The financial situation of the PA is dire at this point in time and it's in nobody's interest if it collapses. It's clear they need more money," said a senior EU diplomat ahead of a monthly foreign ministers meeting in Brussels on Monday.