© Reuters Israeli Ambassador to the United Nations Ron Prosor (left) and Palestinian President Mahmoud Abbas
The Israeli move, coinciding with Mr Abbas's arrival to a hero's welcome in the West Bank, came as the Israeli prime minister, Benjamin Netanyahu baldly rejected last Thursday's resounding vote granting the Palestinians full UN observer status.
It left the Palestinian Authority (PA) facing a financial black hole that could prevent it from paying the salaries of thousands of workers, just as Mr Abbas in Ramallah exhorted his countrymen to celebrate "a decisive landmark on the path of our national struggle".
The decision was the latest sign of Israel's mounting fury over last week's vote and came two days after Mr Netanyahu's government announced it would build 3,000 new settlers' home in east Jerusalem and the West Bank, effectively annexing land the Palestinians have earmarked as part of a future state.
Israel's finance minister, Yuval Steinitz, said this month's PA tax revenues would be withheld to pay off its debts to the Israel Electric Corporation, which supplies the Palestinians with power. Israel transfers money to the PA as part of the 1993 Oslo Peace Accords, which is designed to pave the way towards a two-state solution.
"We said from the beginning that the raising of the status of Palestine at the UN would not produce no reaction from Israel," Mr Steinitz said.
The decision was immediately condemned by a senior Palestinian official, Yasser Abed Rabbo, as "piracy and theft".
Speaking before yesterday's weekly cabinet meeting, Mr Netanyahu called the Palestinians' bid for enhanced UN recognition a "gross violation" of their agreements with Israel and insisted he would push ahead with further settlement building.
"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," he said.
In further comments quoted by the Channel 10 television station, he appeared to justify settlement expansion as necessary to stop the West Bank becoming a launching pad for the kind of rocket attacks that Israel has encountered from Palestinian militants in Gaza, where Jewish settlements were dismantled in 2005.
"Israel will not allow Judea and Samaria (the West Bank) to become a terror base from which rockets will be launched into Israeli towns," he said.
Last Friday's announcement of new settlers' homes, including some in a highly-contentious area known as E1, was denounced by the US secretary of state, Hillary Clinton, and the Foreign Secretary, William Hague, who said it would damage the chances of achieving a two-state solution.
Mr Abbas has refused to return to peace talks without a freeze on settlement building.
Speaking in Ramallah following his triumphal return from New York, he said Israel's moves were a reaction to the world saying "yes to a Palestinian state [and] no to aggression, to these settlements and this occupation".
"Your victory has provoked the forces of occupation and settlement. It has deepened the enemy's isolation in the world," he told a flag-waving crowd of around 5,000 outside the Muqatta, the PA's headquarters. "We have been threatened with sanctions from so many quarters. [But] we ignored the threats and went and achieved what we wanted to achieve."
He said Palestinians now had to bring about reconciliation between his Fatah movement, which is in charge of the West Bank, and Islamist organisations like Hamas, which runs Gaza. "In the next few days, we will start the first steps towards achieving reconciliation," he added.
If they can't squeeze them for taxes, they have no qualms in outright stealing thier money. Armed robbers in suits.