Israel's far-right Finance Minister Bezalel Smotrich ordered the seizure of 100 million shekels ($26 million) of tax funds intended for the Palestinian Authority (PA), saying the funds would instead support Israeli victims of "terrorism".
It is the latest withholding of duties for the PA, which exercises limited autonomy in parts of the Israeli-occupied West Bank, since Israel's war on Gaza began in October.
In a statement issued late on Sunday, the finance ministry claimed the confiscation of funds was "part of measures to combat terrorism".
The statement quoted Smotrich alleging the PA diverted the funds to the "families of terrorists", an accusation he has made before.
Israeli politicians have regularly criticised the Ramallah-based PA for granting financial support to the families of Palestinians killed or jailed for confronting Israel.
A 2004 law enshrined the PA's responsibility to guarantee "a dignified life" for current and former Palestinian prisoners in Israeli jails for actions against Israel's occupation.
The law ensures "their economic rights and those of their relatives" are protected.
Palestinians view the pension as a lifeline for families and a symbolic gesture of support against Israeli occupation.
The finance ministry statement said this was the fifth time it had withheld funds, which Israel collects on behalf of the Palestinian Authority.
The PA – whose finances have come under increasing strain during the Gaza war – did not immediately respond to AFP requests for comment.
Smotrich said on social media platform X that the withholding of Palestinian funds was part of a broader strategy to prevent the creation of a Palestinian state "to ensure security" for Israelis, alongside increased settlement in the West Bank.
A Jerusalem-based diplomat told AFP that this is a new tactic.
"They are thinking of new ways to sanction the PA and destroy it. It's crazy, they are pushing the PA to collapse", said the diplomat.
Israeli settlements in the West Bank are illegal under international law.
The United States, Israel's top ally, supports steps towards a Palestinian state.