Jerusalem: Israel said on Sunday it has suspended tax transfers to the Palestinians in response to their US-backed President`s agreement to forge an alliance with rival Hamas Islamists opposed to peace talks.
A senior Palestinian official in the occupied West Bank said Israel had no right to withhold Palestinian funds.
Israeli Finance Minister Yuval Steinitz said he had suspended a routine handover of 300 million shekels (USD 88 million) in customs and other levies that Israel collects on behalf of the Palestinians under interim peace deals.
In an interview on Army Radio, Steinitz said that Israel feared the money would be used to fund Hamas, an Islamist militant group that runs the Gaza Strip and whose founding charter calls for the destruction of the Jewish state.
Israel had threatened sanctions last week in response to Palestinian President Mahmoud Abbas` announcement of a unity deal with Hamas that envisages the formation of an interim government and elections later this year.
"Peace is possible only with those who want to live in peace with us, and not with those who seek to destroy us," Israeli Prime Minister Benjamin Netanyahu said in public remarks to his cabinet on Sunday.
He said he would tell the leaders of Britain and France, during a visit there later in the week, that Israel sought peace but would "stand firm against those who want to harm us and endanger our existence."
Palestinian leaders have been invited by Egypt to Cairo for a three-day ceremony starting on Monday that will end with the signing of the unity agreement, Palestinian officials said.
US-backed Israeli-Palestinian peace talks were revived in September but quickly fizzled after Netanyahu refused to extend a limited building moratorium in Jewish settlements in the West Bank, territory Palestinians want as part of a future state.
Abbas has said he would return to negotiations only if construction in settlements in the West Bank and East Jerusalem, areas Israel captured in a 1967 war, was halted. Netanyahu has said that is an unacceptable precondition for talks.
The tax transfer mechanism provides Abbas` Palestinian Authority, which exercises limited self-rule in the West Bank, with USD 1 billion to USD 1.4 billion annually -- two-thirds of its budget.
"If the Palestinians can prove to us ... that there is not a joint fund between the Palestinian Authority and Hamas in Gaza, I believe that we will reconsider the matter," Steinitz said.
"We ask the entire world not to fund Hamas, so we must not do so, even indirectly," he said.
Asked about Israel`s decision, Saeb Erekat, a senior Palestinian official, said: "Israel has started a war even before the formation of the government."
Steinitz noted that Israel had withheld the tax revenues in the past, during a Palestinian uprising that began in 2000.
The unity accord could also imperil hundreds of millions of dollars of US aid if it gives a more prominent role to Hamas.
Democratic and Republican lawmakers in Washington have cautioned that US funding could not flow to a government that includes a group still on the US list of foreign terrorist organisations.