Netanyahu pledges to freeze PA transfers as Israeli hardliners compete for clout following settler's killing

Israel collects around $127 million a month in customs duties levied on goods destined for Palestinian markets that transit through Israeli ports and then transfers it to the PA.

The Israeli parliament last year passed legislation to partially withhold funds, in response to PA payments to families of Palestinians jailed by Israel for attacks against Israelis.

"By the end of the week, the staff-work necessary for implementing the law on deducting terrorists' salaries will be completed," Netanyahu - who faces a general election in April - told reporters at the start of the weekly cabinet meeting.

"Next Sunday I will convene the security cabinet and we will approve the necessary decision to deduct the funds. Let nobody doubt, the funds will be deducted, at the start of next week," he said in Hebrew.

Earlier on Sunday, Education Minister Naftali Bennett was among rightwingers pressing Netanyahu to implement the law after a Palestinian was arrested at the weekend on suspicion of killing 19-year-old Ori Ansbacher.

"The law to offset terrorist funds passed...last July," he Tweeted. "I call on the prime minister - apply the law immediately."

Amid calls for capital punishment and a harsh response to Ansbacher's killing, Israel's army on Sunday said it had started preparations to demolish the West Bank home the the suspected killer.

A 29-year-old man from Hebron was arrested over the weekend and has not yet been charged over the killing.

The body of Ansbacher, 19, was found late on Thursday in southeast Jerusalem, and she was buried the next day in her Israeli settlement of Tekoa.

With political tensions high in the runup to Israel's April elections, however, Israeli politicians and media have seemingly rushed to conclusions about the motive of the attack.

"I have no doubts about the nationalist motives of the murderer," Public Security Minister Gilad Erdan told public radio.

"After so many years of suffering from terror we should know - this is a nationalist attack."