Finance Minister Nabil Kassis called the crisis "the worst" in three years. He said Tuesday that paychecks would be issued when the government can afford it.
The Palestinian economy is heavily dependent on foreign aid. Donor countries have given billions of dollars to the Palestinians since 1993, but many have cut back contributions since the global financial downturn.
The International Monetary Fund has called on the Palestinians to improve their business environment and attract more investment to enable growth.
The Palestinians have been forced to delay paychecks to government workers in the past. It previously announced it expects a $1.1 billion budget deficit in 2012.