This came after sources close to an Israeli government official told AFP earlier that Israel is considering filing war crimes suits overseas against Palestinian leaders in response to their ICC application.
Haaretz daily, citing an unidentified official, said the tax move involves $127 million (106 million euros) in VAT and customs duties on goods for the Palestinian territories that pass through Israel.
"The funds for the month of December were due to pass on Friday, but it was decided to halt the transfer as part of the response to the Palestinian move," the paper quoted the official as saying.
Another official, who spoke on condition of anonymity, confirmed the report to AFP but would say no more.
Palestinian Prime Minister Rami Hamdallah complained Friday that the money had not been received and the finance ministry said the delay would make it hard to pay civil servants' salaries.
The measure is in response to Friday's Palestinian application to join the ICC and press war crimes charges against Israel there.
Chief Palestinian negotiator Saeb Erakat said the freeze was a war crime.
"This decision is a new Israeli war crime, but we won't back off in the face of those pressures," he told AFP.
Israel has repeatedly delayed payments to the Palestinians to signal its displeasure.
It did so in 2012, after they won a UN vote recognising Palestine as a non-member state.
And it employed the tactic twice in 2011 --after president Mahmud Abbas announced reconciliation with Islamist militant group Hamas and after the Palestinians won admission to UNESCO.
Under the terms of an economic agreement between the sides signed in 1994, Israel transfers to the Palestinian Authority tens of millions of dollars each month in customs duties levied on goods destined for Palestinian markets that transit through Israeli ports.
The tax revenues make up around two-thirds of the Palestinian Authority's annual budget, excluding foreign aid.
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Israeli judicial offensive
Meanwhile, legal proceedings at courts in the United States and elsewhere are being weighed against Abbas, his Palestinian Authority and other senior officials, the Israeli sources said in a statement.
The basis of the complaints would be that Abbas's partnership in a consensus government with Hamas makes him complicit in the militant Islamist group's rocket attacks from Gaza against civilians in Israel.
"In recent days officials in Israel stressed that those who should be wary of legal proceedings are the heads of the PA who cooperate within the unity government with Hamas, a declared terrorist organisation which like the Islamic State (jihadist group) carries out war crimes -- it fires at civilians from within population centres," the statement said.
The sources, who declined to be named, did not detail precisely where or when such proceedings could be launched.
The Palestinians' ICC bid is firmly opposed by Israel and the United States.
It is part of a shift in strategy for the Palestinians, who are seeking to internationalise their campaign for statehood and move away from the stalled US-led negotiation process.
The US has branded the ICC move as "counterproductive" and warned it would only push the sides further apart.
UN Secretary General Ban Ki-moon is to review the so-called instruments of accession and notify state members on the request within 60 days.
The Palestinian consensus government took office last June, following the reconciliation deal between Hamas and Abbas's Fatah movement, ending seven years of rival administrations in the West Bank and the Gaza Strip.
Hamas remains the de facto power in Gaza and fought a bitter summer war with Israel, which took the lives of 73 people on the Israeli side and nearly 2,200 Palestinians, mostly civilians.
According to Israeli government figures, Hamas fired 4,562 rockets during the fighting in July and August, reaching as far as Tel Aviv and Jerusalem.