KHAN YUNIS, Gaza Strip, Feb 23 (AFP) - Mukhtar Mohammed Oneba, a gargantuan, moustachioed man in a chequered headscarf and golden-fringed robe, was dispensing justice in the Gaza Strip since long before the Palestinian Authority was formed in 1994.

Now, under the mounting pressure of harsh measures Israel has taken to counter the Palestinian uprising -- steps which have paralysed much of the already inefficient Palestinian bureaucracy -- village elder Oneba has been called on once again to handle legal disputes.

"The (Palestinian) Authority is not free to take care of its people," Oneba said in his diwan -- a cement-floored room where people in Khan Yunis sit on carpets, drink sweet coffee and work out punishments for murderers and rapists that are acceptable to both the families of victims and perpetrators; Mukhtars know that quick justice is needed to prevent a deadly cycle of vendetta.

The return to traditional forms of law and order is a sign that Yasser Arafat's Palestinian Authority (PA), squeezed by a five-month Israeli blockade, is no longer able to fully provide basic services to the three million Palestinians in the West Bank and Gaza Strip.

The potential collapse of the PA, which has trouble paying its more than 100,000 employees, has mobilised both the United Nations and the United States, which have urged Israel to ease economic restrictions, or risk destroying the Palestinians' only centralised leadership, ushering in unpredictable consequences in the Middle East.

Justice minister Freih Abu Meddein said Israel was trying to cripple the Palestinian Authority, punishing it for orchestrating the intifada or uprising that has left more than 415 people dead since September.

"We are under pressure to let the Palestinian Authority collapse," he said. "We are accustomed to being frustrated, but now we are paralysed.

"Prosecutors can't reach Khan Yunis," Abu Meddein said of the city of 90,000 in southern Gaza. "Police can't apprehend murderers; we can't transfer prisoners; judges can't arrive in court; we can't use official cars."

On a desk behind Abu Meddein was a fax from the West Bank city of Ramallah asking for permission to release some 25 detainees held for months in Palestinian jails without trial, a result he said, of administrative strain caused by the Israeli blockade.

"By definition when the centre cannot reach the periphery it is not connected," said Salem Ajluni, chief of the economic affairs unit for the UN Special Coordinator for the Middle East Peace Process. "When the Palestinian Authority cannot reach the people it is serving, it is weakened."

Abu Meddein added: "All of civil society could collapse. The Israelis want this and they will pay the price."

Israel's response to the Palestinian intifada has included an internationally-condemned lockdown which has ravaged the Palestinian economy. Palestinians can no longer work in Israel, nor travel freely between Arab-run areas, leading to soaring unemployment and driving one million people into poverty.

"It is the dirtiest battle to fight with bread and medicine. We don't feel there is sovereignty in the streets," said Abu Meddein.

But Haider Abdel Shafi -- an 82-year-old Palestinian legislator who opinion polls show is one of the most popular men in the occupied territories -- said the closure has exposed deep flaws in official Palestinian institutions.

"Don't think there is an Arab regime that is more corrupt than the Palestinian Authority," Abdel Shafi said, blaming Arafat's style of one-man rule for fostering nepotism, corruption, rivalries and inefficiency.

Israel has further pressured the PA by withholding what Palestinian officials say amounts to more than 400 million dollars collected by the Jewish state through taxes and customs duties.

Israel's foreign ministry director general Alon Liel said the Palestinians had only themselves to blame.

"We suffered a blow to our image, but they ruined their economy... They have become a beggar state."

Arab states which have pledged more than a billion dollars to support Palestinians, have been reluctant to send it, fearing the money would be eaten by corruption, western diplomats have said.

Finance minister Mohammed Zuhdi Nashashibi said Arab states, mainly Saudi Arabia, have only transferred 50 million dollars of the pledged funds, 200 million of which was earmarked for budgetary support.

He said the PA urgently needs 420 million dollars to pay salaries, provide social support for the 250,000 unemployed and to prop up the health sector, strained by the thousands injured in the fighting.

Abu Meddein said Arab states have preferred to channel money directly to Islamic opposition groups like Hamas and Islamic Jihad, which could create another Afghanistan or Algeria.

Nashashibi however, said the PA would not likely go bankrupt, stressing that it could always borrow money or issue bonds. He said he would raise the issue of the "political games" being played with the Arab funds at a summit in Jordan next month.

Until the PA sorts out its financing and plasters over the cracks in its eggshell-thin bureaucracies, Mukhtar Oneba will work in his diwan to maintain the basic tenets of Palestinian society, functioning aeons before the PA or Israel were established.