* UN agency halts work after violent Gaza protest
* Tensions in Gaza and West Bank remain high
* U.S. envoy returning to region for fresh talks
Islamist group Hamas on Friday urged a United Nations agency to resume its operations in the Gaza Strip, accusing the world body of over-reacting by shutting down after its headquarters was stormed by demonstrators.
The main U.N. humanitarian agency for Palestinians closed all its offices in Gaza on Thursday after protesters stormed its headquarters to demand it reverse a decision to cut an annual $40 handout to the poorest Gazans.
The dispute comes against a broader backdrop of growing Palestinian unrest in both Gaza and the occupied West Bank, with no end in sight to the decades-old Middle East conflict.
U.S. Secretary of State John Kerry is due to return to Israeli-Palestinian diplomacy on Sunday, with meetings scheduled in both Ramallah and Jerusalem from April 7-9, just two weeks after President Barack Obama's first visit to the region.
Like Obama before him, Kerry is not expected to bring any new initiative to revive peace talks, which broke down in 2010.
The past week saw violent clashes between youths and Israeli security forces in the West Bank, which raised fears that a new uprising, or Intifada, might be brewing. There were reports of sporadic confrontations on Friday, but not on the same scale as earlier in the week.
In another sign of the tensions, rockets were fired out of Gaza for three days running this week, while Israeli warplanes carried out their first strike on the territory since November.
The storming of the U.N. Relief and Works Agency (UNRWA) compound in Gaza on Thursday was part of a dispute that has been brewing for weeks and was not tied to diplomatic events, but it laid bare the frustration brewing amongst Palestinians.
UNRWA provides assistance in Lebanon, Syria, Jordan, Gaza and the West Bank to Palestinian refugees and their descendants - now put at some five million spread out across myriad camps.
The agency has said it will not resume work in Gaza, including food distribution to 800,000 Palestinians - nearly half the population of the enclave - unless it receives assurances from Hamas over the safety of its staff.
"People are demonstrating because they're frustrated and the situation in Gaza just seems to be getting worse," said Robert Turner, the director of UNRWA operations in Gaza.
"We respect everyone's right to peaceful protest, but what happened yesterday was unacceptable," he told Reuters, saying initial reports suggested up to 200 demonstrators, some carrying iron rods, had forced their way into the UNRWA compound.
Hamas called the closure of UNRWA offices "unjustified".
"When UNRWA's administration called Palestinian security they arrived, restored calm and ended the state of chaos," said Hamas spokesman Sami Abu Zuhri. "Therefore, we urge UNRWA to rethink its decision."
Turner said UNRWA faced a $68 million shortfall in 2013 and took the decision to cut the $40 annual handout to 106,000 Gaza refugees to save some $5.5 million. To soften the blow, the agency was offering job schemes to help the poorest families.
News that food centres had been shut down shocked Gaza.
"If UNRWA closes down the food distribution centres, it would lead to a disaster," said Fathi Al-Seidi, 30, who lives in a refugee camp. He added that locals were dependent on the UNRWA aid and cash from Western-backed authorities in the West Bank.
"Without this, life will be equal to zero," he said.
U.N. officials said UNRWA appeared to be bearing the brunt of disillusionment in Gaza that followed a short-lived spurt of optimism last November when a ceasefire deal between Hamas and Israel raised hopes of an easing of restrictions on the enclave.
Israel, supported by Egypt, imposes a partial trade blockade on Gaza, saying it is needed to prevent arms reaching Hamas, which does not recognise Israel and has not renounced violence.
Since the November truce, which ended eight days of fighting, the restrictions have barely changed while Egypt has launched a crackdown on illegal smuggling tunnels into Gaza.
Underscoring Hamas's difficulties, the group's leader Khaled Meshaal said on Thursday it faced a "financial problem", suggesting Arab allies were not providing sufficient aid.