Israel has rejected the United Nations' vote on Palestinian statehood and announced it will withhold a £75m tax transfer in retribution, reports the Guardian.
Palestine gained enhanced non-member observer status last week in a vote in the UN General Assembly, a move Israel has condemned as "absurd".
Israel collects tax and tariff revenue on behalf of the Palestinian Authority (PA) in the West Bank which is used to pay the salaries of public servants.
Although the money will instead be used to pay off some of the £125m debt that the PA owes to the Israeli Electric Corporation, an Israeli official confirmed that the move was in response to the UN vote.
According to Al Jazeera, Finance Minister Yuval Steinitz said: "I have no intention of transferring the taxes due to the Palestinian Authority this month. They will be used to pay the PA debts to the Israeli electricity company and other bodies."
Israeli Prime Minister Benjamin Netanyahu described the bid for statehood as "a gross violation of the agreements signed with the state of Israel", referring to peace pledges signed in the 1990s.
On Friday his government announced plans to build 3,000 settler homes in east Jerusalem and the West Bank.
The continued expansion of Israeli settlements is highly controversial and is seen as a stumbling block for prospective peace plans.
The move was widely condemned in the international community.
Israeli Prime Minister brushed off concerns. He said on Sunday: "We will carry on building in Jerusalem and in all the places that are on the map of Israel's strategic interests," reports Reuters.
The announcement comes on the same day that Palestinian leader Mahmoud Abbas was given a hero's welcome on his return to the West Bank.
He told rapturous crowds: "Now we have a state. Palestine has accomplished a historic achievement."
According to the BBC, PA officials had not yet been formally informed of the decision to withhold the tax revenue.