The European Court of Auditors says the EU should stop handing over aid money to pay Palestinian civil servants in Gaza who do not work.
The court looked at 1 billion euros of spending for the four years starting in 2008.
A spokesman for the European Commission said many people could not work in Gaza due to the fragile security situation.
Auditors also said that they could trace around 90 million euros that was earmarked to pay fuel taxes and keep a power plant open.
Get a different perspective
Every story can be told in many ways: see the perspectives from Euronews journalists in our other language teams.