RAMALLAH, March 3 (Reuters) - Palestinian Finance Minister Nabil Kassis announced his resignation on Sunday, saying the government had failed to address a gaping budget deficit.

No decision has been taken to lower the deficit substantially, and on the contrary it is growing ahead of ratifying the (2013) budget, Kassis said in comments to al-Ayyam newspaper explaining his reasons for quitting.

Prime Minister Salam Fayyad told cabinet members he had accepted Kassis's resignation.

Kassis, who was appointed only last year and has called for austerity measures, said the estimated $3.6 billion budget of the Palestinian Authority would show a deficit of $1.37 billion this year.

The Authority, which exercises limited self-rule in the occupied West Bank, has been in a financial crisis fueled by shortfalls in foreign aid, renewed tensions with Israel and a need to meet an expanding public sector payroll.

In the past few months, it has failed to pay full salaries to its 160,000 employees in the West Bank and in the Gaza Strip, territory controlled by the rival Hamas Islamist movement.

Israelm, which occupied the West Bank and Gaza Strip in 1967, withheld tax revenues it collects for the Palestinian Authority after President Mahmoud Abbas secured U.N. de facto statehood recognition in November, though it did transfer the funds, totaling about $100 million a month, in January and February. (Reporting by Ali Sawafta, writing by Nidal al-Mughrabi; editing by Jeffrey Heller and Philippa Fletcher)