Israel is to immediately unblock revenues it collects on behalf of the Palestinian Authority, frozen last year in retaliation for the Palestinians winning upgraded UN status, the premier's office said on Monday.
The decision came after a visit last week by US President Barack Obama to Israel and the West Bank and follow-up meetings with both sides by Secretary of State John Kerry, who has pushed for the move since taking office in February.
Prime Minister Benjamin Netanyahu "has decided to authorise the transfer of fiscal revenues to the Palestinian Authority," his office said, adding finance ministry officials had already been instructed to renew the transfer of funds.
A spokesman for Netanyahu said the decision was to take effect "immediately".
Israel in early December announced it would not transfer tax and tariff funds it collects for the severely cash-strapped Palestinians, in response to their successful UN campaign which the Jewish state had fiercely opposed.
Netanyahu authorised what he called a one-off release of $100 million at the end of January, with an aide citing the Palestinians' "very difficult financial situation".
Palestinian prime minister Salam Fayyad said the move simply restored the previous state of affairs.
"The Israeli decision has turned the situation back to what it was before, to how it should be in any case," Fayyad told a news conference in the West Bank city of Ramallah.
"The Israelis lifted their siege on Palestinian money," he added. "We now expect to receive our money each month as normal."
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Ahead of Obama's visit, the Palestinian Authority urged the world to step up financial aid and press Israel to allow economic development, over fears of "political collapse" due to Israeli fiscal barriers.
On Friday, as Obama left Jerusalem for Amman, a top official in Washington said the US had unblocked almost $500 million in aid to the Palestinian Authority which had been frozen by Congress for months.
"To date, we have moved $295.7 million in fiscal year 2012 money... and $200 million in fiscal year 2013 assistance," State Department spokeswoman Victoria Nuland told reporters.
The Palestinian bid for observer state membership of the UN -- a resolution that passed with overwhelming international support -- had also angered Washington, which said the move undermined efforts for bilateral talks.
A UN report last week said Israel must ease financial restrictions on the Palestinian Authority.
"Israel should refrain from withholding and/or delaying the transfer of clearance revenue owed to the PA," said the office of the UN Special Coordinator for the Middle East Peace Process, Robert Serry.
He also warned that "Palestinian state-building achievement was at increased risk and the PA was facing ever greater political and financial pressure."
Israel usually transfers tens of millions of dollars in customs duties each month levied on goods destined for Palestinian markets that transit through Israeli ports. They constitute a large percentage of the Palestinian budget.
The transfers are governed by the 1994 Paris Protocols which govern economic agreements between Israel and the Palestinians.
But Israel often freezes the transfer of funds as a punitive measure in response to diplomatic or political developments it deems harmful.