After years of threats, the Palestinians finally turned to the ICC last month after the UN Security Council rejected a resolution setting a deadline for ending Israel's occupation of their lands.
A furious Israel responded by freezing the transfer of tax revenues it collects for the Palestinian leadership and threatening further punitive measures.
The moves dashed hopes of a return to peace talks that have failed time and again, including in last year's aborted bid led by US Secretary of State John Kerry.
Analysts say the Mideast conflict has moved into a new chapter, with the Palestinians pursuing a fresh strategy of putting pressure on Israel through the international community.
"The peace process born at Oslo is dead and buried, and we're now at the start of a new phase," said Karim Bitar, a Middle East analyst based in Paris, referring to the 1993 peace accords.
How far Israel will take its response to the ICC bid will be a key question, analysts say, as it will fear going too far in undermining the Palestinian Authority.
"Israel has a dilemma -- we want to have leverage against the Palestinians, to prevent them from referring (cases) to the ICC," said Robbie Sabel, a former legal adviser to the Israeli foreign ministry.
"However, we don't want to undermine them. It's in our interest that they be in effective control of the West Bank."
Under the 1993 Oslo Accords which established the Palestinian Authority, the two sides agreed to coordinate on security issues in the occupied territories.
The Palestinians have threatened to halt that cooperation, raising fears of increased security risks to Israel.
Following the ICC move, Israel's Intelligence Minister Yuval Steinitz threatened "severe" steps in response, even referring to a "gradual dissolution" of the PA.
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But analysts said such a step would be unlikely.
No 'clear advantage' yet
"Its dismantling would cause instability and an explosion in the region. The PA is banking on the international community to put pressure on Israel to avoid this," Gaza-based political analyst Naji Sharab said.
Even the United States, Israel's key ally, has denounced its freezing of the transfer of some $127 million (106 million euros) in tax money to the PA, with the State Department urging both sides "to avoid actions that raise tensions".
But Washington also said it was "deeply troubled" by the Palestinian move to become party to the ICC, describing it as "counterproductive" and warning it would "only push the parties further apart".
The Palestinians, who became an observer state at the UN in 2012, say they will turn to the court to seek the prosecution of Israeli officials for alleged war crimes, including during last summer's 50-day war in Gaza.
Israeli Prime Minister Benjamin Netanyahu has vowed to put up a vigorous defence of his troops, while officials have warned the Jewish state was ready to counter with its own lawsuits against senior Palestinian officials.
Bitar said both sides seemed to be struggling with how to adjust to this new phase.
The Palestinians, he said, had demonstrated "amateurism" in going to the UN Security Council "without doing the groundwork in terms of lobbying and negotiating", while the Israelis were "rigid and inflexible" in their reaction.
"This new chapter, of a power struggle in the international arena, is still in its early stages and it's not yet clear how it will play out," Bitar said.
"So far no one appears to have a clear advantage."