The Palestinian Authority (PA) on Tuesday decried as a "declaration of war" an Israeli law penalizing the Ramallah-based authority over stipends paid to detainees in Israeli jails and families of those killed by Israeli forces.
"This is a declaration of war against the Palestinian people and their freedom fighters and prisoners who sacrificed for the sake of Jerusalem and the establishment of an independent Palestinian state," PA spokesman Nabil Abu Rudeinah said in a statement cited by the official Wafa news agency.
On Monday, the Knesset (Israeli Parliament) passed a bill that would allow cutting funds to the PA by the amount it pays to detainees and families of Palestinian martyrs.
The withheld money would instead go into a fund designated to help victims of attacks carried out by Palestinians.
Without elaborating, the Palestinian spokesman warned that the PA would take "critical decision" if the Israeli law was put into force.
This issue is considered one of the red lines that no one is allowed to surpass
Under the Oslo Accords, signed in 1993 between Israel and the PLO, Israel collects around $175 million every month in taxes on Palestinian imports and exports on behalf of the PA.
Tax revenue represents the PA's main source of income.
US-sponsored peace talks between the Palestinians and Israel collapsed in 2014 over Israel's refusal to halt settlement building in the occupied territories.
The situation escalated after the US administration of Donald Trump in December officially recognized Jerusalem as the capital of Israel.
Jerusalem remains at the heart of the Middle East conflict, with Palestinians hoping that East Jerusalem — occupied by Israel since 1967 — might eventually serve as the capital of an independent Palestinian state.