JERUSALEM, Jan 17 (Reuters) - The European Union has suspended 35 million euros ($42 million) in aid to the Palestinians, citing their lack of budgetary discipline, the EU's commissioner for external relations said on Tuesday.

The rare sanction underscored intensified foreign donor scrutiny on the Palestinian Authority since Israel quit the Gaza Strip last year after 38 years of occupation. The impoverished territory is widely seen as a testing ground for statehood.

Visiting the region ahead of Palestinian legislative elections on Jan. 25, the EU commissioner, Benita Ferrero-Waldner, said half of 70 million euros ($84 million) donated through the World Bank in November has not been released, and that the issue was under discussion...