Israel has imposed sanctions against the Palestinian Authority (PA) in retaliation for signing a number of international treaties, officials say.
They say taxes collected on behalf of the PA will be frozen, with limited access to bank deposits in Israel.
Palestinian chief negotiator Saeb Erekat has condemned the move as “Israeli hijacking” and “theft”.
Observers say it further complicates US-led talks, which resumed on Thursday and have faltered in recent weeks.
In the latest development, Israeli officials are quoted as saying that debt payments would be deducted from tax transfers routinely received by the PA.
Israel collects taxes on behalf of the Palestinians, and transfers about $100m (80m euros) per month, accounting for two-thirds of the authority’s budget.
It is not yet clear how much money will be withheld or for how long.
Israel has also said it would suspend its participation in a gas exploration off the coast of the Gaza Strip.
Mr Erekat told AFP news agency it was “theft of the Palestinian people’s money” and a “violation of international law and norms by Israel”.
It follows Israel’s decision on Wednesday to limit its contacts with Palestinian officials in reaction to PA President Mahmoud Abbas’s signing of several UN human rights conventions last week.