Steinitz told Israel Army Radio that some 300 million Israeli shekel ($88 million) that were to have been transferred this week to PA will now stay in Israeli hands until it becomes clear the funds will not reach the coffers of “the Hamas terrorist organization.” Israel collects more than $1 billion a year on behalf of the PA, making up some two-thirds of the entity’s annual budget.

Steinitz added that the funds could be unfrozen “if the Palestinians can prove to us ... that there is not a joint fund between the Palestinian Authority and Hamas in Gaza.”

Under the Oslo Accords, the Israeli government collects tax and customs duties on behalf of the PA. At the beginning of 2001, during the second intifada, Israel withheld more than $50 million in taxes it owed the Palestinians in order to force the PA to crack down on Palestinian armed groups.

The Israeli decision came in the wake of last week’s agreement between Fatah and Hamas to form a national unity government and to prepare for general elections as part of their efforts to end an internal split. The government of Israeli Prime Minister Benjamin Netanyahu decided last week to freeze any contact with the incoming national unity government and warned it would impose sanctions following the announcement of the deal.

Palestinian President Mahmoud Abbas, who is also the head of Fatah, and Hamas politburo chief Khaled Meshaal are expected to sign the accord in Cairo Wednesday.

Palestinian officials slammed the Israeli decision. Prime Minister Salam Fayyad said the Israeli decision will not force the Palestinians to stop efforts to unite and reconcile. “The Israeli threats will not deter us from achieving national unity.”

Fayyad added: “The PA has contacted some very influential elements worldwide to try and convince Israel not to take this step. We are determined to see the reconciliation through despite this decision.”

The prime minister said the PA had not receive an official communication from the Israeli government about the decision.

Saeb Erekat, a member of Palestine Liberation Organization's Executive Committee, said the Israeli decision was “clear financial piracy that aims at destroying the peace process and undermining international efforts to build a Palestinian state.” Israel had “no right” to meddle in the PA’s internal affairs, including reconciliation between Fatah and Hamas.

“Israel has started a war even before the formation of the government,” Erekat said, and added that the quick Israeli reaction to attempts at forming a Palestinian unity government was evidence the Palestinian split served Israel’s interests.

He said the unity government would be made of technocrats and would prepare for elections within a year.

Nimer Hammad, political adviser to Abbas, said a fitting Palestinian response to the Israeli decision will be to form a Palestinian national unity government at the earliest. He said the Palestinian leadership and Abbas took Israeli threats into consideration before reviving the unity talks with Hamas.