The Palestinians have condemned Israel for withholding $138 million (Dh507m) in funds after the murder of a Jewish woman in Jerusalem.
Nabil Abu Rudeineh, spokesperson for the Palestinian Authority, which has limited self-rule in the West Bank, said the decision was “piracy of the Palestinian people’s money”.
He said that the Palestinian leadership would react forcefully to the decision.
"We consider this arbitrary Israeli decision to be a one-sided blow to the signed agreements, including the Paris Protocols," he said, referring to economic relations between Palestinians and Israelis as laid out in the 1993 Oslo Peace Accords.
The Israeli government's security Cabinet said on Sunday that it was implementing a law passed last year allowing Israel to withhold funds used to pay stipends to Palestinian attackers and their families from taxes Israel collects on the behalf of the PA.
Israel says the payments encourage violence — a claim the Palestinians reject.
In the past Palestinian officials have defended the payments by saying those involved in deadly attacks are a small percentage of those aided by the fund, and that the Palestinian Authority has a responsibility to its citizens like any other government.
The freeze comes as the Palestinians face major budget cuts made last year after the United States slashed funding for the United Nations Relief and Works Agency's Palestinian refugee programme and for development programmes in the Palestinian territories. The UN's World Food Program also cut back services due to funding shortages.
The Palestinians ended all public ties with the US after the cuts and US President Donald Trump's decision to move the US embassy from Tel Aviv to Jerusalem in December 2017. They say that officials in the Trump administration are too biased in favour of Israel to be an impartial mediator in the decades-long conflict.
Meanwhile, Hamas, which rules Gaza has taken over the Palestinian side of the enclave's main goods crossing, Kerem Shalom, with Israel after employees for Mr Abbas' Palestinian Authority left the terminal.
The PA said that Hamas had “expelled [its] employees and banned them from entering the crossing”. Hamas denied the accusation, saying that they left of their own volition.
A Hamas representative said the group is carrying out "necessary security measures" at the crossing after a deterioration in relations between Hamas and the PA.
The group has controlled Gaza since 2007 but the PA has maintained a role in co-ordinating the entry of goods into the enclave.
