Apr.08, 2010, 10:14am EDT

(Reuters) - Hamas's seizure of funds from a Gaza Strip bank has drawn warnings from bankers that institutions could pull out of the territory, citing a risk to their reputation that would harm their business elsewhere.

In a challenge to the West Bank-based Palestine Monetary Authority (PMA), Hamas last month seized around $400,000 from a Gaza bank branch whose management had frozen the funds to comply with global anti-money laundering regulations.

It was the first time Hamas, which has run Gaza since 2007, had challenged the authority of the Ramallah-based PMA -- a body that regulates banks operating in the West Bank and the Gaza Strip.

Hamas said the funds were seized from a local bank in line with a court order challenging the Ramallah-based authorities' decision to freeze assets belonging to a medical association. The PMA had frozen the funds after the board of the Patient's Friend Association had come under Hamas control.

Analysts said it was only a matter of time before the PMA's efforts to comply with international regulations on dealing with groups such as Hamas, listed as a terrorist organization by the United States, brought it into confrontation with the movement. "All of us are concerned. The banks are concerned and we are equally concerned," PMA head Jihad al-Wazir told Reuters.

Bank executives raised their concerns a day after the seizure in a meeting with the PMA in Ramallah.

Taher al-Nono, spokesman for the Hamas government in Gaza, said the banks' concerns were unfounded.

"We respect the banking system in Palestine," Nono said.

Of the 19 banks in the Palestinian territories, 12 have branches in the Gaza Strip. They hold deposits valued at some $900 million. Total deposits held by Palestinian banks are valued at $7 billion.

Only local and Arab banks operate in Gaza but international bank HSBC has a branch in the West Bank.

The Gaza banks have continued to operate since Hamas seized control of the territory in 2007 after defeating forces loyal to President Mahmoud Abbas.

The prospect of Hamas imposing its will on the institutions again could force many to shut down, senior bankers said, citing a risk stemming from global anti-money laundering regulations.

Their ability to do business elsewhere would be damaged if they were seen to be cooperating with the group, they said.

"Banks may take protective measures such as low-profiling or even closing their Gaza branches to protect their existence elsewhere," said a senior bank official.

Another banker said: "If one bank shuts down, other banks will follow."

The bankers also expressed concern at Hamas's plan to levy taxes on businesses in the Gaza Strip. In a February 7 letter sent to banks and other businesses, the Hamas-run Finance Ministry in Gaza asked for the payment of taxes it said had not been paid since 2007. A copy of the letter was seen by Reuters.

A PMA official said: "We told banks to put it in the shredder."

Israeli banks severed ties with banks in the Gaza Strip in 2007 after the Jewish state declared it an "enemy entity."

"Gaza branches face either lowering their profiles or shutting down," said Mahmoud Al-Ram'a, the general manager of Palestine Islamic Bank.