Israeli Cabinet ministers have decided to keep withholding around $100m in monthly tax revenues owed to the Palestinian Authority, in what is being seen as retaliation for its bid for membership to the United Nations.
The revenues, used to pay tens of thousands of Palestinian salaries, have been withheld since the Palestinian Authority was granted full membership of heritage body Unesco on 3 November. Israel has also suspended funding for Unesco itself.
Ministers decided on Monday they would continue to withhold the funds, against the clear advice of the Israeli Defence Minister Ehud Barak.
Tony Blair, the Quartet representative to the Middle East and former British prime minister, condemned the withholding of funds, saying: "This is Palestinian money that is vital and necessary for the PA to continue functioning and providing services to Palestinians".
The Unesco move, part of the Palestinian Authority's wider bid to gain statehood, angered the Israelis, who say the UN bid is hampering their ability to negotiate with the Palestinians directly.
The monthly payments from Israel are mainly customs and income taxes collected on their behalf under an interim arrangement.
The payments are needed by the Palestinian Authority to pay employees, including security forces, and there have been warnings from the defence ministry that the whole stability of the Palestinian government in the West Bank could be put in peril.