Israel is imposing sanctions on the Palestinian government after a controversial unity deal between Palestinian moderates and militants.
Israel has suspended tax transfers to the Palestinian Authority in the West Bank, holding up an $88-million payment planned for this week. The decision follows a reconciliation agreement between the Western-backed Palestinian Authority and the rival Islamic militant group Hamas, which rules the Gaza Strip.
Israel collects some tax and customs fees for the Palestinian government under peace agreements signed in the 1990s. Israeli Finance Minister Yuval Steinitz said the "burden of proof is on the Palestinians."
Steinitz said Israel needs guarantees the money will not go to Hamas, which he described as a terrorist organization.
The United States and European Union also consider Hamas a terrorist group because it has carried out dozens of suicide bombings in Israel and fired thousands of rockets across the border from Gaza.
Israeli Prime Minister Benjamin Netanyahu condemned the Palestinian reconciliation agreement at the weekly Cabinet meeting in Jerusalem.
He said the agreement should not only worry Israelis, but also people around the world who want to see peace between Israel and the Palestinians. Netanyahu said peace is possible only with those who want to live in peace and not with Hamas, which seeks Israel's destruction.
Palestinian Prime Minister Salam Fayyad said Israeli threats would not stop reconciliation with Hamas, and he urged the international community to pressure Israel to drop the sanctions.
Hamas expelled the more moderate Palestinian Authority from Gaza during a civil war in 2007, and since then the two factions have been bitterly divided. But they decided to reconcile because the rift was widely seen as harming the Palestinian cause.
The reconciliation agreement is due to be signed Wednesday in Cairo. It calls for an interim Palestinian government to be created in the coming weeks and elections in a year.