Finance Minister Yuval Steinitz said he plans to "temporarily suspend" the transfer of about $89 million in tax revenues and other levies collected on behalf of the PA in accordance with the Oslo accords, Army Radio reported Sunday.
The decision was made in response to last week's announcement of the Fatah-Hamas reconciliation and plans to establish a unity government, Yedioth Ahronoth said.
Unnamed government officials told the newspaper Israel fears the money will be used by Hamas to purchase arms.
Last week, senior Hamas officials declared they had no intention of recognizing Israel or entering peace negotiations.
"This is not Israeli money -- it is Palestinian money," Dr. Mustafa Barghouti, secretary-general of the Palestinian National Initiative, told the Palestine Monitor. Barghouti called Israel's decision to halt the transfer of funds "an act of piracy."
"This is an aggressive act that shows Israel is against not only the Palestinian unity but Palestinian democracy," he said. "Israel is trying to dictate how the Palestinians should run their internal affairs."
Speaking at the weekly Cabinet meeting, Prime Minister Binyamin Netanyahu said everyone in the world who seeks peace should be concerned over the reconciliation, Haaretz said.
A future peace can only be created "with those who want to be on our side and not those who want our annihilation," Netanyahu said.
The Oslo Accords signed in 1993, provided a framework for the future relations between Israel and the Palestinian Authority. The Paris Agreement signed between the sides a year later stipulated that Israel is responsible for setting the value added tax and custom rates on goods in the Gaza Strip, and collecting taxes and transferring the funds to the PA each month.