Chief Palestinian National Authority negotiator Saeb Erekat called the report "nonsense," saying the Palestinian leadership was determined to apply for membership.
Palestine Liberation Organization lawmaker Hanan Ashrawi also denied the report, first published by Israel's Haaretz newspaper Wednesday.
"We should stop dealing with Israeli propaganda," Erekat said, while Ashrawi told the Palestinian Ma'an News Agency "the Israeli media tools are not the source of information for the Palestinian positions and decisions."
Britain's Daily Telegraph expanded on the story Friday, even while acknowledging the denials.
Haaretz reported the Palestinian National Authority told Washington it would freeze all moves for membership in U.N. agencies such as the World Health Organization and the World Trade Organization until the end of January, if Israel releases about $100 million in in tax and customs revenues.
Israeli has withheld the money to punish the authority after UNESCO, the world body's cultural arm, agreed Oct. 31 to admit Palestine as a full member state,
The authority will also not ask the General Assembly to upgrade the Palestinian observer status to that of a non-member observer state, Haaretz reported, citing a European diplomat it said was briefed by the authority on the proposal.
The authority wants Israel to release 500 to 700 prisoners it holds, the Telegraph said, citing Western diplomats.
Israeli special envoy Isaac Molho met secretly in London Tuesday with U.S. special Middle East and Persian Gulf envoys David Hale and Dennis Ross and with a senior Arab figure to discuss the suggestion, Haaretz said.
Neither Prime Minister Binyamin Netanyahu's office nor the U.S. State Department commented on the report.
Palestinian President Mahmoud Abbas is expected to ask for a U.N. Security Council vote by the end of December.
It appears unlikely the vote will pass, letting Washington avoid having to exercise its veto, The New York Times reported.
Israel collects the customs and tax revenues under a 1994 internationally brokered agreement. The money makes up two-thirds of Palestinian government revenues, with the rest largely coming from foreign aid.
Netanyahu Monday discussed his desire to release the funds Monday during an inner Cabinet meeting, but backed down in the face of opposition from several ministers, Haaretz said.
Palestinian officials acknowledged the Israeli move plunged the West Bank into financial crisis and warned public-sector employees they might not get paid in December.
If the authority goes bankrupt, Israel would be forced to resume direct control over West Bank cities, the Telegraph said.
The loss of public-sector jobs would also badly hurt the popularity of Abbas and his moderate Fatah party, while letting the Islamist rival Hamas, which governs the Gaza Strip, move into the vacuum left by the Palestinian Authority's fall, the Telegraph said.
The United States and Israel classify Hamas as a terrorist organization.