Israel has halted the transfer of tax and tariff money it collects for the Palestinian Authority (PA) in response to their successful bid for UN non-member observer state status.
Yuval Steinitz, Israel's finance minister, said on Sunday that the government would use the money it was to transfer to the Palestinians to pay down their debt to the Israel Electric Corporation and other Israeli bodies.
"I have no intention of transferring the taxes due to the Palestinian Authority this month," Steinitz said.
"They will be used to pay the PA debts to the Israeli electricity company and other bodies."
Without the transfer, the PA will not have the money to pay government salaries.
Al Jazeera's Nicole Johnston, reporting from Ramallah, said 150,000 public service employees rely on the money.
The move is the second such act by Israel. On Friday, it announced it would press ahead with plans to build thousands of settler homes on illegally occupied territory.
Johnston said the new settlements would mean a 25km journey from Bethlehem to Ramallah would be more than quadrupled to 120km as Palestinians would be forced to circumvent the settlements.
This move, said Johnston, would make it "very difficult for Palestinians to have any kind of a contiguous state" in the future.
Ahead of the UN vote, Israel's government had warned the Palestinians and the international community that it would react harshly to an upgraded status for the Palestine, accusing them of leapfrogging negotiations and disregarding peace accords.
The Palestinians say the upgraded status does not contradict any effort for new talks, pointing out that negotiations have been on hold since late September 2010.
Israel's Haaretz newspaper said a total of $120m would be withheld from the Palestinians.
Every month, Israel transfers tens of millions of dollars in customs duties levied on goods destined for Palestinian markets that transit through Israeli ports.
The tax revenues constitute a large percentage of the Palestinian budget and are governed by the 1994 Paris Protocols with the Palestinians.
Israel has frozen payments to the PA before, usually during times of diplomatic tension.
The UN victory for the Palestinians was a diplomatic setback for Israel, which was joined by only a handful of countries in voting against upgrading the Palestinians' observer status at the UN to "non-member state", like the Vatican, from "entity".