DUBAI, April 15 (Matt Smith/Reuters) - The boss of a telecoms company accused Israel of using sanctions to hold the Palestinian economy hostage after the Jewish state stopped his firm from importing equipment to launch services in Gaza.

Wataniya Palestine had imported 40 percent of the equipment it needed to launch a mobile service - considered a driver of economic growth - before Israel last week tightened restrictions on the Palestinian territories.

Why is the economy held hostage? Don't you want to give people hope or is it just a way to polarize society? Wataniya's chief executive Fayez Husseini told Reuters in an interview.

You're pulling the private sector into the political arena. Let the economy grow, let the people work and then you defuse political tension.

Israel imposed economic sanctions against the Palestinians on Thursday in retaliation for their leadership signing international conventions.

An unnamed Israeli official told Reuters then that the Jewish state would deduct debt payments from tax transfers the Palestinian Authority routinely receives, and limit the self-rule government's bank deposits in Israel.

The official made no mention of a trade element to the sanctions, though Husseini said that when the Palestinians went to the U.N. agencies all (Wataniya's) remaining shipments were halted.

Having waited seven years to begin operations in Gaza the firm, an affiliate of Qatar's Ooredoo, had obtained Israeli permission for the equipment imports into the enclave in December.

We have no ability to install or operate a radio network there. It was not optimal, but we accepted what Israel proposed in terms of spectrum and they were supposed to come back four weeks ago with the final go-ahead and we haven't heard since.

Loss-making Wataniya received telecommunications license for the calls- and text-based 2G and Internet-capable 3G services in the Palestinian Territories in 2007.

It launched 2G in the West Bank in 2009, having waited two years for frequencies. It is still waiting for further spectrum to provide 3G services in the territory and Israel has halted talks on that as part of the sanctions, said Husseini.

POLITICS AND TECHNOLOGY

Israel, which occupied the West Bank in a 1967 war, controls the airwaves of the territory, and Palestinian firms' lack of 3G is a constraint on its technology sector while Israel's soars.

It's a pure political issue and it will only serve to slow down the economy, said Husseini. 3G is all about data and businesses getting connected.

The World Bank estimates that a 10 percentage point rise in broadband penetration can increase a country's economic output by between 0.5 and 1.4 percent.

Under its license, Wataniya should be the sole 3G provider in the West Bank for four years. But 3G sim cards for Israeli operators are being sold there illegally, Husseini said.

He estimates Wataniya is losing about $100 million of 3G revenue annually to Israeli operators. There's a spillage of 3G from the settlements into the West Bank cities, said Husseini. It comes at no cost - they don't pay any taxes, any fees.

Husseini urged the Palestinian Authority to extend and amend Wataniya 15-year license to allow for the restrictions it has faced, and said the remaining $214 million it owes on its $354 million license fee should be waived.

Our view is that we overpaid and we should not be paying any more, said Husseini, as the 3G four-year exclusivity clause constitutes the majority of the license fee.

Wataniya generated revenue of $89.2 million in 2013, up from $84.1 million a year earlier. That increase helped it trim its loss last year to $21.3 million from $23.8 million in 2012.

Husseini said a prolonged cost-cutting program will enable the company to turn profitable even without Gaza or West Bank 3G, but we will not be like a normal telco, where we should have been a supermarket. We will have to operate like a grocery store ...We plan to break even by 2016-2017.

Wataniya sold 15 percent of its shares in an initial public offering in 2011. It was also due to float a further 15 percent.

Given our situation we don't feel there will be any demand for our shares at this point, he added. When things turn around we will go back to the original plan.

Wataniya's shares ended Monday at $0.91, up slightly on Wednesday's all-time low, but 30 percent below their IPO price. (Reporting by Matt Smith; Editing by John Stonestreet)