RAMALLAH, West Bank, Nov 1 (Tom Perry/Reuters) - A major developer says Palestinians will not be able to meet demand for 450,000 new homes in the West Bank over the next decade unless Israel eases restrictions on land use.

Not only has Israel resisted calls to curb Jewish settlement building in the occupied West Bank but has effectively frozen Palestinian home construction in the same territory for years through restrictive zoning, the head of the Palestine Investment Fund (PIF) says.

The PIF, owned by the Palestinian Authority, plans to erect 30,000 new homes across the West Bank over the next decade under an affordable housing scheme. The PIF is a partner in a new mortgage fund that is expected to fuel demand.

Mohammad Mustafa, the PIF chairman, says the homes he is planning are a drop in the ocean. Palestinians need 450,000 new homes in the West Bank over the next 10 years, he says. The current restrictions will not allow such growth, he adds.

Despite widespread pessimism about the outlook for the 17-year-old peace process, Mustafa hopes the situation will change to alleviate the land supply squeeze created by a system of zoning agreed in the 1990s.

As a result of interim peace agreements, the Palestinians must seek Israeli permission to build in 60 percent of the West Bank, known as Area C. The land is under full Israeli control.

In the remaining land, known as Areas A and B, the Palestinians can build freely. We've had our own freeze on construction over many years, Mustafa said in an interview with Reuters. Very little construction has been allowed in 60 percent of the land.

Area C includes Jewish settlements where Israel lifted a self-imposed, 10-month moratorium on new building at the end of September. The end of the freeze derailed US-backed peace talks.

The Palestinians say the settlement building must stop to prevent a permanent loss of contiguous territory needed for a viable Palestinian state under any peace deal with Israel.


CONSTRUCTION BOOMING BUT RESTRICTED

In areas where the Palestinians can build freely, construction is booming. Apartment and office blocks are going up all over Ramallah, where the Palestinian Authority is based.

The construction is a sign of economic growth attributed to generous donor support to the Palestinian Authority and confidence generated by its policies, plus a loosening of Israeli movement restrictions and relative calm in recent years.

On the outskirts of Ramallah, the PIF is developing a new suburb called Al-Reehan. Built at a cost of $200 million, it will comprise 2,000 new homes. The PIF sees it as a pilot for other projects across the West Bank and is investing in a similar, smaller project in the northern West Bank.

In the areas where the Palestinians can build freely, Mustafa says it is hard to find tracts of land big enough for the large-scale housing developments the PIF has in mind.

PIF encountered the problem recently when looking for land in the Bethlehem and Hebron areas. We are not finding large blocks of land, he said. Instead of doing one large development, we're looking at doing several smaller ones.

There isn't enough room in Areas A and B for 450,000 housing units, he said. We do have land in Area A but it's so scarce it limits your options and makes the prices higher and the affordability issue becomes a problem.

The cost of land in Area C is less than 25 percent of the cost in Areas A and B because people are uncertain about it.

Through the Palestinian Authority, the PIF has asked Israel to hand over civilian control of Jordan Valley land so it can invest $2 billion in new urban development and tourism there. So far they have been listening in a positive way, Mustafa said. They see that this potentially could provide economic development and stability for that region, he said.