Israeli and Palestinian officials held fresh US-mediated talks Thursday, but the crisis-hit peace process was dealt a new blow as Israel unveiled sanctions against the Palestinians.
Israel, which collects about 80 million euros ($111 million) in taxes on behalf of the Palestinian Authority -- two-thirds of its revenues -- has decided to freeze the transfer of that money, an official told AFP.
Israel was also suspending its participation with the Palestinians in developing a gas field off the Gaza Strip and putting a cap on Palestinian deposits in its banks, the Israeli official said, asking not to be named.
However, the official said "discussions under the aegis of the United States to overcome the talks crisis will continue".
Palestinian chief negotiator Saeb Erakat lashed out at the move, calling it an act of "Israeli hijacking and the theft of the Palestinian people's money".
The decision is a "violation of international law and norms by Israel" in revenge for the Palestinians' move to join a raft of international treaties as a state, Erakat told AFP.
Earlier State Department spokeswoman Jen Psaki confirmed a new round of talks between the Israeli, Palestinian and US negotiators had been held Thursday. But she downplayed reports of a deal in the works.
"The gaps are narrowing, but any speculation about an agreement are premature at this time," said Psaki.
Washington remains in "intensive negotiations" with both sides, she told reporters.
"We're working, as you know, to determine what the path forward is for these negotiations, and that is up to the parties."
The talks hit a new impasse last week after Israel refused to release a final batch of Palestinian prisoners and the Palestinians retaliated by seeking accession to several international treaties.
US Secretary of State John Kerry blamed Israel this week for the deadlock as Washington mulled how much more time and effort to put into the faltering negotiations.
American envoy Martin Indyk presided over Thursday's meeting in Jerusalem between Israel's chief negotiator, Justice Minister Tzipi Livni, and her Palestinian counterpart, Saeb Erakat, said a Palestinian source close to the talks.
Also present were Palestinian intelligence chief Majed Farah and Yitzhak Molcho, a confidant of Prime Minister Benjamin Netanyahu.
The Palestinians were pushing for the release of a final batch of prisoners, a commitment Israel reneged on in a move that sparked the crisis.
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Israeli television reported that the two sides were on the verge of a deal to extend peace talks beyond their April 29 deadline.
The deal would see the Palestinian prisoners released in return for Washington freeing American-born Israeli spy Jonathan Pollard, Channel 2 television said.
- Pollard reports 'incorrect' -
But insisting there was no deal yet, Psaki said "no decision has been made about Jonathan Pollard", who is eligible for release next year.
Meanwhile Israel's Economy Minister Naftali Bennett, who heads the far-right Jewish Home party, threatened to pull his party out of the coalition if there was a deal on the release of Palestinian prisoners.
"If the government proposes this deal to us, the Jewish Home party will pull out of the coalition," he said.
The Israelis have repeatedly asked Barack Obama and previous US presidents to release Pollard, sentenced to life in 1987 for passing US secrets on Arab and Pakistani weapons to Israel.
Psaki revealed that Indyk would return to Washington this week for consultations with Kerry and the White House.
He would then go back to the region some time next week.
A Palestinian official also denied any deal was yet on the table, telling AFP there was still a "deep chasm" between the two sides.
When Israel refused to release 26 long-time Palestinian prisoners, it went back on a pledge it made at the launch of the peace talks.
The Palestinians responded by abandoning their own commitment not to seek international recognition until the nine months of talks ended, applying for accession to 15 treaties.
The United Nations said Thursday it had accepted the deposit of the request, but Psaki said that was merely "a technical step... so I don't think it changes, necessarily, what we're negotiating now".