* Fayyad was unpopular at home but trusted by the West
* Remains caretaker prime minister after resignation
* Abbas to oversee implementing U.S. development plan
Fayyad quit on Saturday after months of tension with President Mahmoud Abbas, leaving the Palestinian Authority, which exercises limited self-rule in the Israeli-occupied West Bank, in confusion just as the United States tries to revive peace talks with the Jewish state.
His departure comes less than a week after U.S. Secretary of State John Kerry visited him and announced that Washington would put together a plan to remove the "bottlenecks and barriers" to economic development in the West Bank.
The U.S.-educated Fayyad, a former World Bank official, was appointed in 2007 and drew praise from the West for his efforts to develop institutions fit for a future Palestinian state. But his popularity among average citizens sank steadily amid 25 percent unemployment and soaring prices.
Palestinian officials said Fayyad, long trusted by the West as a non-corrupt conduit for its aid funds, would not be handling the U.S. development plan in his capacity as interim caretaker prime minister.
But, one official said, "everyone knows that aid is meant for the Palestinian people, and not just one man", and implementation of the initiative would be monitored by President Mahmoud Abbas and "a team of his choosing".
Hanan Ashrawi, a senior official in the Palestine Liberation Organisation, said Fayyad's resignation was a matter of internal politics and should have no bearing on Western efforts to shore up the Palestinian economy.
"It would be counterproductive and flagrant meddling to punish us for what was a domestic political decision, and something that was long in the making," Ashrawi said.
Abbas and his Fatah party had long wrangled with Fayyad, an independent, over his handling of the moribund economy. The deficit and public debt have deepened amid World Bank predictions that growth rates of 11 percent in 2010-11 would fall by half in 2013.
Despite Fayyad's reputation for clean dealing in the West, 78 percent of West Bank residents perceived Palestinian Authority institutions to be corrupt, according the same survey by the Palestinian Center for Policy and Survey Research.
Some Palestinian officials credited Fayyad with progress, but said he faced long odds of reviving an economy under Israeli occupation and dwindling aid flows.
The Hamas government in Gaza, which split from Fatah in a bloody 2007 war, despised Fayyad, whom it regarded as complicit in Israel's blockade on the coastal enclave and a usurper of Hamas's claim to the premiership after it swept parliamentary polls in 2006.
"It's good that he's left. This gives (Fatah-Hamas) reconciliation a way forward," said Mohammed Dar Ahmed, 23, who is one of the 4,800 Palestinians in Israeli jails. Dar Ahmed spoke to Reuters during an Israeli-sponsored media tour of Ofer prison in the West Bank.
"What about settlements, what about the prisoners? We need a prime minister who will solve the issues of Palestine," he said. It was not immediately clear why he was in prison.
Palestinian law requires the president choose Fayyad's replacement within two weeks, but Abbas has outstayed his own term by four years and parliament has been defunct for years.