Mr Wolfensohn was welcomed by Palestinians

He is expected to be named as a special representative of the Middle East "quartet" (UN, Russia, EU and the US).

His task will be to help co-ordinate reconstruction efforts after Israel's planned withdrawal from Gaza.

Palestinians welcomed the reported appointment of Mr Wolfensohn, who spent 10 years at the head of the World Bank.

Senior Palestinian negotiator Saeb Erakat said: "We welcome this appointment of James Wolfensohn, who in his work with the World Bank here, extended help to the Palestinians.

"He is a very respectable, decent and dignified man and he is welcomed here."

Charisma

The appointment is to be confirmed by US Secretary of State Condoleezza Rice, on behalf of the "quartet", sources told Reuters news agency.

Mr Wolfensohn would be tasked with "not only trying to enhance co-ordination between Israel and the Palestinians, but would oversee economic assistance components that would help rehabilitate the economy in Gaza," the source said.

Israel is planning to pull all its 8,000 settlers from Gaza and the troops that protect them as part of a disengagement plan due to be carried out in a few months' time.

The BBC's Washington correspondent Rob Watson says Mr Wolfensohn is renowned among World Bank staff for his charisma, charm and occasional outbursts of temper.

In his decade in charge he has attempted to transform the institution which lends some $20bn a year to developing nations.

He emphasised the need to fight poverty in developing nations, and fought hard with considerable success to reduce the debts owed by some of the world's poorest countries, our correspondent says.

Mr Wolfensohn was understood to have been keen to serve a third term at the Bank, but the US decided to replace him with its Deputy Defence Secretary Paul Wolfowitz.