The Finance Ministry announced on Wednesday that 435 million shekels ($115 million) that were to be transferred to the Palestinian Authority in December would be used to compensate the Israel Electric Corporation for the more than 600 million shekels ($160 million) it is owed by the Palestinians. The move comes a day after Foreign Minister Avigdor Lieberman said Israel would stop transferring tax revenues collected on behalf of the Palestinian Authority until at least March, in response to its statehood campaign at the United Nations last month.

Finance Minister Yuval Steinitz had already indicated Israel would impose such financial sanctions on the PA during a Dec. 2 cabinet session that was held just a few days after the U.N. General Assembly voted to grant "Palestine" the status of a nonmember observer state, like the Vatican. In the wake of that vote, the Israeli government announced plans to build 3,000 new homes in Judea and Samaria and east Jerusalem and said it might go ahead with construction in a sensitive area close to Jerusalem.

Israel collects some $100 million a month in duties on behalf of the Palestinian Authority because the latter lacks its own facilities to handle overseas imports. The Hamas-controlled Gaza Strip is highly dependent on the Israeli grid because it lacks sufficient infrastructure to generate enough power on its own. (Because Israel considers the Islamic organization a terrorist group, the Palestinian Authority serves as an intermediary for the transactions.)

"The Palestinians can forget about getting even one cent in the coming four months, and in four months' time we will decide how to proceed," Foreign Minister Avigdor Lieberman said in a speech on Tuesday night. "Israel is not prepared to accept unilateral steps by the Palestinian side, and anyone who thinks they will extract concessions this way is wrong," he said.

Israel says Abbas violated the Oslo Accords from the 1990s and dishonored a pledge to avoid unilateral steps by sidestepping stalled negotiations and securing the Palestinian status upgrade in the United Nations last month.

Lieberman, among the most hawkish members of Prime Minister Benjamin Netanyahu's Likud-led government, said the Palestinians also had other outstanding fees they must pay the Governmental Authority for Water and Sewage. Israel has recently revoked VIP passes for several top Palestinian Authority figures, among them the former head of its Preventive Security Force, Jibril Rajoub. The passes usually allow unrestricted travel through various checkpoints in the West Bank and allow its holders to enter Israel.

Yasser Abed Rabbo, a senior Palestinian official, said earlier this month that Israel was guilty of "piracy and theft" by refusing to hand over the funds.

The Delegation of the European Union to Israel has also criticized Israel for not handing over the cash. "Contractual obligations ... regarding full, timely, predictable and transparent transfer of tax and custom revenues have to be respected," it said on Wednesday in a statement posted on its website.

The leader of the left-wing Meretz party MK Zahava Gal-On asked Attorney-General Yehuda Weinstein on Wednesday to reverse the Finance Ministry's decision. "These funds do not belong to the State of Israel but to the residents of the Palestinian Authority; the finance minister and the prime minister have overstepped their authority in a most egregious manner," she said.

Israel has previously frozen payments to the PA during times of heightened security and diplomatic tensions, provoking strong international criticism, such as when UNESCO granted the Palestinians full membership a year ago.