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Prime minister Salam Fayyad's resignation is likely to raise questions over donor support for the Palestinian Authority and may slow its steps towards statehood, experts warn.
Palestinian president Mahmud Abbas accepted the US-educated economist's resignation late on Saturday, ending a crisis of confidence sparked six weeks ago over the finance portfolio.
But officials say the dispute dates back more than six months when mass protests over the cost of living and the price of fuel swept the Palestinian street, sparking calls for Fayyad to step down.
"The issue came up in September when people started to question Fayyad's economic policies which then got worse with protests calling for his departure, which were notably supported by Fatah leaders," one official said, referring to Abbas's ruling party.
"Things became unbearable for Fayyad especially because the leaders and officials were constantly criticising his policies and achievements," another source said, also speaking on condition of anonymity.
At the time, Fayyad had little room for manoeuvre as a result of the crisis resulting from the non-payment of promised aid, largely from the Arab world and the US, and from Israeli moves to freeze tax monies owed to the Palestinian Authority.
However, in the past month, international donors have pledged fresh efforts to find the necessary funds and Washington quietly unblocked almost $500 million (382 million euros) in aid which had been held up by Congress.
And Israel agreed to unblock revenues collected on behalf of the PA that were frozen last year in response to the Palestinians winning upgraded UN status.
As a result, the PA on March 28 adopted a budget of some $3.9 billion, of which $1.4 billion would have to come from foreign financing.
Last month, the World Bank said the worsening fiscal situation could cause "lasting damage" to the competitiveness of the Palestinian economy, and a separate IMF report warned the crisis could "ultimately lead some to question the legitimacy of the PA and undermine its ability to govern effectively."
Fayyad, who formerly worked with both institutions, is widely respected on the international scene for cleaning up the PA's finances and for his institution-building efforts.
As speculation about his imminent resignation gathered pace late last week, US Secretary of State John Kerry called Abbas late on Friday in a last-ditch bid to head off the crisis.
Several hours after his resignation, Washington hailed him as "a strong partner to the international community and a leader in promoting economic growth, state-building and security for the Palestinian people."
While there was no official reaction from Israel, Haaretz newspaper said Fayyad's departure was likely to have an impact both on foreign aid donations as well as on moves announced last week by Kerry to revive the West Bank economy.
"Without Fayyad guarding the public coffers, it's not certain that the countries currently providing the Palestinian Authority with aid will continue to do so," wrote the paper's diplomatic correspondent Barak Ravid.
"Israel will also hesitate to promote economic measures in the West Bank with Fayyad away from the steering wheel," he wrote.
But Imad Ghayatha, a political scientist at Bir Zeit University on the West Bank dismissed any suggestion that Fayyad's departure would affect international aid.
"This will not affect relations with donors," he told AFP.
"Maintaining the PA is not only a Palestinian interest but also an Israeli and a regional one. The peace process relies on maintaining the PA and international powers know better than to tie up their interests with one individual," he said.
Although Fayyad's resignation would not damage the PA's relationship with the international community, it would bring a greater degree of global scrutiny, said Abdel Majid Sweilam, a political scientist from Al-Quds University in Jerusalem.
"The PA's performance without the presence of Fayyad will be even more under the microscope," he told AFP.