Palestine's successful bid to be recognised as a "non-member observer state" in the United Nations last Thursday has come at a cost; after the Israeli government announced on Sunday that it would be withholding $118 million in tax revenues to the Palestinian Authority this month, in response to the "Palestinian provocation."

Under the 1993 Oslo Peace Accords, which was designed to pave the way towards a two-state solution, Israeli tax authorities presently collect customs duties on goods entering the Palestinian territories via Israeli-controlled ports and land borders on behalf of their Palestinian counterparts, before transferring the receipts to the PA - in addition to income taxes and social security contributions from Palestinian workers in Israel.

But over the last 10 years, Israel has intermittently withheld payment to Palestine, often as a punitive measure in retaliation to diplomatic or political developments viewed as harmful.

According to the Wall Street Journal, the latest decision was the second act of reprisal by the Israeli government, who also announced last Friday to build thousands of new housing units for Jewish settlers in the PA-claimed West Bank.

"If Israel freezes the transfer of revenue, the PA will not be able to pay its wages, thereby risking social upheaval given the already rising discontent due to the worsening economic conditions...There is no other source of financing," said Oussama Kanaan, the IMF mission chief for the West Bank and Gaza, to WSJ.

Israel's plans to build in east Jerusalem and the West Bank would deal an "almost fatal blow" to any prospects for peace with the Palestinians, UN Secretary-General Ban Ki-Moon further warned.

But Israeli officials appeared defiant, and some even warned of more reprisals to come.

"I don't intend to transfer funds this month," told Israeli Finance Minister Yuval Steinitz to a government cabinet meeting on Sunday. "[Instead] the money will be used to deduct debts the PA owes to the Israel Electric Corporation and other bodies."

"The Palestinians were warned that there were measures that could be taken if they went forward with this unilateral step at the UN. We are now following through on that word," added one senior Israeli government official to The Times. "There are more measures that can be taken if the Palestinians continue to take unwise steps at the UN."

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Needless to say, Palestinian officials were outraged by Israel's move, insisting that such a step was not allowed under the terms of their agreement with Israel.

"Taking PA money is another illegal move by Israel, and comes in addition to a series of measures taken in the past few days, including the announcement of additional settlement construction," told government spokesman Nour Odeh to AFP.

"This is Palestinian money that no one has the right to dispose of it or take action with respect to these funds except the Palestinian Authority," she said. "We await the transfer of Palestinian tax funds in a timely manner."