Israel enacted a law on Monday to financially penalise the Palestinian Authority for paying stipends to Palestinians jailed by Israel, their families, and the families of those killed by Israeli forces.
The 120-seat parliament voted 87-15 in favour of the legislation that orders holding back part of about $130 million (Dh447.4m) in tax revenues that Israel collects on behalf of the Palestinians each month under interim peace agreements.
The western-backed Palestinian Authority headed by President Mahmoud Abbas has limited self-rule in the occupied West Bank where Israel retains overall security control. Palestinians seek a state in the West Bank and the Gaza Strip with East Jerusalem as its capital. The Hamas group, bitter rivals of Mr Abbas's Fatah faction, controls the Gaza Strip.
A top Palestinian official strongly denounced the new law that will freeze money transfers to the Palestinian Authority to punish its payments to families of those jailed for attacks.
"This is a very dangerous decision that amounts to the cancellation of the Palestinian Authority and is piracy and theft," Saeb Erekat, secretary general of the Palestine Liberation Organisation, told AFP.
"Israel is stealing the land and money of the Palestinian people and that is a result of the decisions of President (Donald) Trump, who supports Israel."
Saeb Erekat, secretary general of the Palestine Liberation Organisation, said the move threatened the existence of the cash-strapped Palestinian Authority.
Israeli Prime Minister Benjamin Netanyahu has repeatedly demanded that the Palestinians, who view prisoners as national heroes, stop paying stipends to them and their families.
Earlier this year, US lawmakers enacted legislation to sharply reduce the annual $300m in US aid to the Palestinian Authority unless it took steps to stop making what they described as payments that reward violent crime.
The measure, known as the Taylor Force Act, was named after a 29-year-old American military veteran fatally stabbed by a Palestinian while visiting Israel in 2016.
Israeli Defence Minister Avigdor Lieberman wrote on Twitter after the vote: "We promised to halt the stipend free-for-all for terrorists and we have made good on our promise. It's over. Every shekel that Abu Mazen [Abbas] will pay to terrorists and murderers will be automatically deducted from the Palestinian Authority's budget."
Israel says the payments are a reward and encouragement for the prisoners' actions against it but the Palestinians say they are welfare payments to support them and their families.
According to Palestinian officials, the payments to inmates serving longer sentences for more serious offences are larger than to others serving shorter sentences for lighter offences. Israel says this is an incentive to commit more severe attacks.
Palestinian officials say that some 6,500 Palestinians are being held in Israeli jails. Many of them were convicted of attacks or planning attacks against Israelis.
Youssef Al Mahmoud, spokesman of the Palestinian Authority government in Ramallah, condemned Israel's move saying the money belonged to the Palestinians. Israel had no right to hold it back and it was violating signed agreements.
“This money belongs to the Palestinian people and this is legislation to steal the money of the prisoners and the martyrs who are symbols of freedom for us and they must not be harmed,” Mr Mahmoud said.