Israel will hold up an $89 million cash transfer to the Palestinian Authority [PA] planned for this week because of a new unity deal between rival Palestinian factions.
Israel threatened to impose sanctions last week in response to the surprise announcement of a unity deal between the Palestinian factions Fatah and Hamas, which controls the Gaza Strip.
"Israel wants assurances that any money transferred to the Palestinians will not reach the militant Hamas organisation, which is set to become part of the Palestinian government," Yuval Steinitz, the Israeli finance minister, said on Sunday.
"I think the burden of proof is on the Palestinians, to make it certain, to give us guarantees that money delivered by Israel is not going to the Hamas, is not going to a terrorist organisation, is not going to finance terror operations against Israeli citizens."
According to a report in the newspaper Yedioth Ahronoth, Israeli officials would also cancel talks with the PA aimed at updating the tax transfer mechanism which provides it with $1bn to $1.4bn annually - two-thirds of PA's budget.
Israel collects some tax and customs fees for the Palestinians under the peace agreements of the 1990s.
Israel has held up cash transfers several times in the past decade, citing concerns that the money was being used to fund attacks against Israelis.
Deal raises concern
There was no immediate Palestinian reaction to the Israeli move.
The deal signed between Fatah, the party of Mahmoud Abbas, the Palestinian president, and Hamas is meant to lead immediately to a transitional government and new elections within one year.
The Israeli government said the deal rules out the renewal of deadlocked peace talks and threatens Israeli-Palestinian security cooperation in the West Bank.
The agreement "should worry not only all Israeli citizens but all those across the world who want to see peace between us and our Palestinian neighbours", Benjamin Netanyahu, the Israeli prime minister said on Sunday.
Israel has also expressed its concern to the UN about the deal.
Ehud Barak, the defence minister, on Saturday told Ban Ki-moon, the UN secretary general, of "Israel's concern" over the unity accord struck on Wednesday between Hamas and Fatah, according to a statement.