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.
Meanwhile, US state department spokeswoman Jen Psaki confirmed a new round of talks between Israeli, Palestinian and US officials had taken place on Thursday.
She said the gaps were narrowing, but played down reports of a deal in the making.
Negotiations between Israeli and Palestinians have faltered in recent weeks, with each side blaming the other for violating promises.
The Palestinians were angry when Israel did not sanction the release of a fourth batch of Palestinian prisoners, as agreed in principle under the terms on which they returned to peace talks last year.
Palestinian officials say Mr Abbas signed applications to join 15 international conventions in response to Israel’s failure to release the prisoners.
Israel stressed that it had predicated any prisoner release on progress being made in the negotiations and on the Palestinians abiding by a commitment not to seek membership of international agencies.
Talks had previously stalled after Palestinians were angered by Israel’s decision to approve 700 new settlement units in East Jerusalem – which Israel captured from Jordan in 1967 and formally annexed the area in 1980.
Settlements built there and elsewhere in the occupied West Bank are considered illegal under international law, though Israel disputes this.
US Secretary of State John Kerry has blamed both sides for taking “unhelpful steps”. The peace talks resumed in July under US auspices after a three-year hiatus.