JERUSALEM -- Israel said Sunday it would withhold more than $100 million in tax revenue this month from the cash-strapped Palestinian Authority, the latest reaction to last week's U.N. vote recognizing the Palestinian territories as a "nonmember observer state."
Israeli Finance Minister Yuval Steinitz said he would use the money to repay part of an outstanding Palestinian debt -- estimated to be about $180 million -- to Israel’s electricity company for power supplied to parts of the West Bank.
The action was expected since Israel previously halted the transfer of monthly tax payments in response to a similar U.N. bid by the Palestinians last year. The money is collected on behalf of the Palestinian Authority from West Bank importers using Israeli ports.
Though Israeli officials hinted the move might be temporary, it will likely intensify the financial crisis facing the authority, which is suffering from large budget deficits and has been unable to pay full salaries for months.
The announcement follows one on Friday that Israel would build an additional 3,000 units of Jewish housing in the West Bank and the Jerusalem area on land it seized during the 1967 Middle East war. Most nations consider such construction illegal under international law, and Palestinians have refused to resume peace talks until Israel stops the activity.
The Israeli move did not dampen the celebrations Sunday in Ramallah, where thousands of people gave a hero's welcome to Palestinian Authority President Mahmoud Abbas upon his return from New York. The authority's government headquarters was decked out in the flags of the 138 countries that voted in favor of Thursday's U.N. General Assembly resolution.
"One day, a young Palestinian will raise the Palestinian flag over Jerusalem, the eternal capital of the state of Palestine," Abbas told the jubilant crowds, echoing a phrase the Israeli leaders often use to describe Jerusalem. "Palestine has succeeded in something historic at the United Nations. The recognition of Palestine as a country changes everything. It highlights new realities."
The U.S. and Israel were among nine nations that voted against the measure, arguing that the only way for Palestinians to achieve statehood is through direct negotiations with Israel. Though largely symbolic, the resolution may allow Palestinians to file complaints against Israel in the International Criminal Court or other international forums.
U.S. officials voiced disappointment over the measures Israel has taken in response to the U.N. bid. The Obama administration had asked Israeli Prime Minister Benjamin Netanyahu to avoid taking punitive steps that might weaken Abbas, whom it sees as a moderate Palestinian leader.
American and Israeli anti-settlement groups are particularly alarmed by the possible resuscitation of the proposed E1 settlement project, a controversial development on the outskirts of Jerusalem that would partly divide the West Bank and complicate efforts to create a contiguous Palestinian state.
"E1 is not just a another settlement," said Daniel Seidemann, a Jerusalem attorney and anti-settlement activist. "It's the fatal heart attack of the two-state solution."
Netanyahu had previously agreed to freeze the project amid U.S. pressure, but on Friday the government said it would resume preliminary planning.
During a conference in Washington on Saturday, former Israeli Prime Minister Ehud Olmert called the government's settlement announcement "the worst slap in the face of a U.S. president."
The E1 development was first proposed during the Clinton presidency and every U.S. administration since then has pressured Israel to not build it, Seidemann said. The five-square-mile project would largely cut off the West Bank from Arab neighborhoods of East Jerusalem, which Palestinians hope to make the capital of their state.
Some downplayed the significance of the E1 announcement, saying it may be a strategy by Netanyahu to appeal to right-wing voters and settlers as he faces reelection in January.
Seidemann said there was a strong chance that Netanyahu would back down amid U.S. and international pressure.
But he noted that the number of construction tender offers in 2012 was higher than during the previous three years combined. Final approval for a 2,600-unit development called Givat Hamatos, south of Jerusalem, is expected to be announced as soon as this week.
"We have been witnessing a settlement surge," he said. "The ball is in play. This is not a drill."
During a Cabinet meeting Sunday, Netanyahu said that settlement expansion has long been the government's response to what it sees as attacks against Israel. He noted that similar steps were taken following the 1975 U.N. General Assembly resolution equating Zionism with racism, which was repealed in 1991.
"Today we are building, and we will continue to build in Jerusalem and in all areas that are on the map of the strategic interests of the state of Israel," Netanyahu said.
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