JERUSALEM, March 9 (AFP) - Devastated by months of fighting and a punitive Israeli blockade, the Palestinian Authority is economically ruined and in sorry shape to resume negotiations with Israel's new government, headed by right-wing leader Ariel Sharon.

Analysts and western diplomats say this quasi-government of Palestinian leader Yasser Arafat, which can barely pay its more than 100,000 employees, teeters on the brink of collapse. They say its social services and police forces are unable and at times unwilling to carry out their duties fully.

Arafat, the standard-bearer of the Palestinian independence movement for four decades, also faces challenges from a new crop of local leaders who have emerged from the five-month-long uprising, or intifada, in the West Bank and Gaza Strip.

"Arafat has been the symbol of the movement, and sometimes symbols have so much power and influence," said Mahdi Abdul Hadi of the Palestinian Academic Society for International Affairs. "But sometimes a symbol is only a symbol, and he (Arafat) has no say over the tanzim, the local battles and the confrontations in neighborhoods."

Militants linked to Arafat's Fatah faction are loosely known as the "tanzim," an Arabic word meaning "organization."

For the past few months of the intifada, tanzim gunmen have shot at Jewish settlers in the West Bank and Gaza Strip and fired on Israeli military posts after soldiers kill Palestinians in what have been near-daily protests.

More than 430 people have died in the clashes since last September, more than 80 percent of them Palestinians.

But more than the deaths, which have unified Palestinians against Israel, the weight of the economic closure has exposed and widened cracks in the poorly administrated and reputedly corrupt Palestinian Authority.

The United States and Europe have urged Israel to lift the closure, which prevents more than 100,000 Palestinian workers from reaching jobs in Israel and cuts off access of Palestinian products to Israeli markets.

The army imposed the closure through a network of roadblocks and trenches around Palestinian towns and cities, locking their inhabitants inside.

The result has been to shove one-third of the three million Palestinians in the territories below the poverty line.

In these sealed Palestinian-run clusters, Arafat's Authority does continue to operate, with its police arresting common criminals and its hospitals and schools running, albeit under strain. But the courts and other institutions now function with a backlog unprecedented even in the Palestinian Authority's seven-year history of inefficiency.

Local government can hardly function, with judges and legislators living under virtual house arrest, unable to reach their offices or meet colleagues, a senior UN official said on the condition of anonymity.

Israel has further pressured the Authority by withholding what Palestinian officials say amounts to more than 400 million dollars collected by the Jewish state through taxes and customs duties.

Arab states, which have pledged more than one billion dollars to support Palestinians, have been reluctant to send it, fearing the money would fall prey to corruption, western diplomats said.

The strain on the Palestinian Authority will undoubtedly affect Israeli- Palestinian negotiations if and when they resume.

Sharon has said he wants to meet Arafat in a bid to quell the violence, an apparent easing of his hardline position.

But the ability of the Palestinian Authority to regain control of its people and the patchwork of conflict-torn areas nominally under its command remains to be seen.

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Richard Engel is a Middle East reporter for AFP.