RAMALLAH, West Bank, April 11 (Crispian Balmer/Reuters) - Palestinian President Mahmoud Abbas faced pressure from Western allies on Thursday not to let Prime Minister Salam Fayyad quit at a time when Washington is seeking to resurrect Middle East peace talks.

Palestinian sources told Reuters that Fayyad had offered his resignation in a letter to Abbas following weeks of sparring over his handling of the government and an economic crisis afflicting the Israeli-occupied West Bank.

Fayyad, a former World Bank official, is credited by Western powers with helping create the institutions needed if the Palestinians are to gain independence from Israeli occupation.

His reputation among Palestinians is more mixed.

Aides to Abbas, speaking on condition of anonymity, were scathing in their assessment of the Texas-educated Fayyad, hinting that the president would be pleased to see him go.

However, a Western diplomat expressed dismay at the political in-fighting at a time when the United States is making a concerted effort to revive Israeli-Palestinian negotiations and boost the flailing economy.

Pressure is being put on Abbas to sit on this resignation offer for at least two months to see what comes of the U.S. initiative, said a senior European diplomat, who declined to be named because of the sensitivity of the issue.

Palestinian officials had said earlier that Abbas would meet Fayyad on Thursday to discuss the issue, but the encounter did not take place and it was not immediately clear when the pair might see each other.

During a visit to the region last month, U.S. President Barack Obama hailed Fayyad as a partner in peace, and Secretary of State John Kerry held private talks with the beleaguered prime minister earlier this week, in a clear sign of support.

Admired abroad, including in Israel, Fayyad has failed to build a strong political base within the Palestinian territories, leaving him vulnerable to attacks from Abbas's own Fateh party and the Islamist group Hamas, which governs in Gaza.

Fayyad was one of the few top officials to pay regular visits to marginal communities and ask after their concerns. But angry crowds pelted his image with shoes during protests against commodity price hikes last September, and many locals complain of not being able to make ends meet.

CASH SHORTAGE

As the man who controls the purse strings, Fayyad's problems grew last year when foreign aid started to slow. The situation worsened markedly at the end of the year when Washington froze funding to punish the Palestinians for gaining de-facto statehood recognition at the United Nations.

Israel also withheld tax revenues it collects on behalf of the Palestinians in November and December in response to the unilateral U.N. move, making it impossible for Fayyad to keep up with already delayed public sector salary payments.

Israel resumed handing over the customs dues in January, but economic problems persist and the World Bank said in a report last month that Israel's curbs on trade had inflicted long-term damage on Palestinians' ability to compete in the global market.

Sources close to Fayyad accuse Fateh of stirring political discontent, saying the party wants to get more control over Palestinian Authority (PA) coffers. The same sources complain that Abbas had not given his prime minister enough support.

Relations between the two men soured further last month when Palestinian Finance Minister Nabil Qassis quit, amid disagreements over a forthcoming draft budget. Fayyad accepted the resignation, against the wishes of Abbas.

One source close to Fayyad said the prime minister offered to resign on March 23, adding that conflicting schedules meant he had not been able to see Abbas face-to-face since then.

I do not think Fateh understands that Fayyad is the only Palestinian politician who has the support of a broad spectrum of international donors, said the senior Western diplomat.

The wheels could come off aid deals very quickly with him out of the government. He carried a lot of weight with Washington, with the Israelis and with Europe, he added.

Only on Tuesday, Kerry announced that he was drawing up a detailed package of measures to boost lethargic growth in the West Bank, which is partially controlled by the PA. The plans were due to be unveiled in Washington next week. (Additional reporting by Ali Sawafta, Noah Browning and Mohamad Hassan)