Israel will not transfer tax and tariff funds it collects for the Palestinians this month in response to their successful bid for upgraded UN status, Finance Minister Yuval Steinitz said on Sunday.
"I have no intention of transferring the taxes due to the Palestinian Authority this month. They will be used to pay the Palestinian Authority's debts to the Israeli electricity company," Steinitz said.
Speaking ahead of the weekly cabinet meeting, the finance minister stressed his decision comes after "the raising of the status of Palestine at the UN."
Steinitz's spokeswoman told AFP that Israel normally transfers 460 million shekels ($120 million, 92.7 million euros) per month before deductions.
According to the spokeswoman, the Palestinians owed Israel's electricity company some 800 million shekels ($ 209.7 million, 161.4 million euros). She said the decision to withhold the funds applied only to this month.
A Palestinian government spokeswoman slammed the "illegal" move.
"Taking PA money is another illegal move by Israel, and comes in addition to a series of measures taken in the past few days, including the announcement of additional settlement construction," Nour Odeh told AFP.
"This is Palestinian money that no one has the right to dispose of it or take action with respect to these funds except the Palestinian Authority," she said, adding they awaited "the transfer of Palestinian tax funds in a timely manner."
The Israeli move comes after the Palestinians secured non-member state observer status at the UN General Assembly last week, winning approval in a 138-9 vote over fierce opposition from Israel and the United States.
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Israel on Friday already announced new settlement construction in the wake of the vote, in what was widely considered a punitive response to the bid.
"The response to the attack on Zionism and the State of Israel must reinforce the settlement plan in all areas the government decides," Israeli Prime Minister Benjamin Netanyahu said on Sunday.
"Today we are building and we will continue to build in Jerusalem and in all areas that are on the map of the strategic interests of the State of Israel," Netanyahu said at the cabinet meeting.
Ahead of the UN vote, Israel's government had warned the Palestinians and the international community that it would react harshly to upgraded status for the Palestinians, accusing them of leap-frogging negotiations and disregarding peace accords.
The Palestinians say the upgraded status does not contradict any effort for new talks, pointing out that negotiations have been on hold since late September 2010.
They ground to a halt shortly after they began over the issue of settlement construction. The Palestinians want a freeze on all settlement activity before talks resume, but Israel wants negotiations without any preconditions.
Every month, Israel transfers tens of millions of dollars in customs duties which are levied on goods destined for Palestinian markets that transit through Israeli ports, and which constitute a large percentage of the Palestinian budget.
The transfers are governed by the 1994 Paris Protocols with the Palestinians.
But Israel often freezes the transfer of the funds as a punitive measure in response to diplomatic or political developments viewed as harmful.
The freezes have contributed to an already dire financial position for the Palestinian Authority, which has frequently been unable to make payroll for its employees in the last year.