The United Nations has warned that such a move by Prime Minister Benjamin Netanyahu's government would stifle financial and aid flows to the Palestinians and "most likely trigger conflict".

Israel may start the annexation process as soon as July 1 with the support of US President Donald Trump, who in January published a peace plan that was roundly rejected by the Palestinians.

The UN warned in a report Sunday that, without improved relations between the two sides and if annexation goes ahead, "the achievements of the Palestinian government over the last quarter century will fade.

"The peace and security situation will worsen, and a hardened and more extremist politics on both sides will inevitably result," it said.

Palestinian foreign minister Riyad al-Maliki on Monday said that annexation was "tantamount to an act of aggression".

"This is really a declaration of war," against Palestinian aspirations, he said.

And in an apparent reference to potential Palestinian unrest, Israeli Defence Minister Benny Gantz told the army "to expedite military preparedness ahead of political steps on the agenda in the Palestinian arena", said a statement from his office.

In recent weeks some Israeli commentators have cast doubt on whether the annexation would actually go ahead, saying that the military had so far not been told to prepare contingency plans.

Prospects of annexation appeared to grow after Netanyahu last month forged a unity government following more than a year of political deadlock, and as both Israel and the Palestinian territories are assessing the impact of the pandemic.

- 'Extremely difficult' situation -

The Palestinian territories have seen low infection rates after acting quickly to curtail the spread of COVID-19, with three deaths out of 450 cases registered among some five million residents in Gaza and the West Bank.

But the Palestinian Authority's (PA) financial situation is "expected to become increasingly difficult" due to loss of income and increased spending on healthcare and other areas, the World Bank said in a report.

The fallout is expected to see the number of households living below the poverty line rise this year from 14 to 30 percent in the West Bank, largely due to Palestinians being unable to cross into Israel for work.

The PA last week announced an end to the lockdown it had imposed in early March across the West Bank after a virus outbreak in the biblical city of Bethlehem, a major tourist site.

The easing allowed more than 63,000 Palestinians to pass through checkpoints for work on Sunday, according to the Israeli military branch handling civilian affairs in the Palestinian territories.

The borders of the Hamas-run Gaza Strip, which has been under a crippling Israeli blockade since 2007, remain closed to all but a few returning Gazans, who are quarantined on arrival.

The poverty rate was already 53 percent in Gaza before the pandemic and the World Bank forecast it would jump to 64 percent this year.

Overall, the Palestinian economy is set to shrink between 7.6 and 11 percent, the global body said, a severe downturn after one percent growth in 2019.

- Prevent 'economic collapse' -

The report recommended investing in mobile networks to boost the economy. Palestinians rely on 2G and 3G mobile data networks in Gaza and the West Bank respectively, at a time when some countries are adopting 5G.

While the PA has taken steps to manage the economic blow brought by coronavirus, the World Bank said its financial gap "could increase alarmingly" from $800 million last year to $1.5 billion this year.

"At this point, it is not possible to say how long it will take for the economy to recover from the current containment measures," the bank said.

The Palestinian government relies heavily on donor support to function.

Despite the increased financial needs, support for this year's PA budget is the lowest in two decades, according to the World Bank.

The office of the UN's special Middle East envoy called for "vast resources" to be deployed by the Palestinian and Israeli governments, as well as by foreign donors and the private sector, in response to the pandemic.

While humanitarian and development aid remains important, the United Nations said, "different and bolder action is required to avert economic collapse".

Official Palestinian news agency WAFA said Monday that Prime Minister Mohammed Shtayyeh would on Tuesday hold a videoconference with donors from 40 countries to present a report on the economic situation in the Palestinian territories.