The Israeli parliament has passed a law to withhold money from the Palestinian Authority over its payments to families of Palestinians jailed by Israel or killed while carrying out attacks.
The legislation will freeze part of the $130m (£99m) in tax revenues collected on behalf of the PA each month.
MPs behind the bill said the payments were «essentially an expression of support for acts of terror».
But the PA says it is welfare for relatives of prisoners and «martyrs».
It is estimated to spend about $330m each year — about 7% of its budget — on salaries and benefits under the programme.
Under agreements from the 1990s, Israel collects taxes and tariffs levied on goods passing through its territory on behalf of the PA.
The new law — approved by 87 votes to 15 in the 120-seat Knesset late on Monday — requires the Israeli government to withhold an amount of tax revenue equal to what is paid by the PA to «individuals who were involved in terror activity against Israelis and their families».
If the defence ministry determines that such payments are no longer being made, the frozen funds will be returned to the PA.
Defence Minister Avigdor Lieberman hailed the legislation, saying: «An effective war on terrorism also passes through the pocket — of the terrorists, of their families and of [Palestinian Authority President] Mahmoud Abbas.»
But chief Palestinian negotiator Saeb Erekat condemned what he called a «very dangerous decision that amounts to the cancellation of the Palestinian Authority and is piracy and theft».
«When we signed Oslo Agreement, it was clear to Israel that the Palestinian Authority pays these families, and they never objected,» he was quoted as saying by the Associated Press.
«Now they are creating a problem just to avoid addressing the real problems, which stems from the Israeli military occupation and building the settlements on our land, not the social welfare money that goes to the families who lost their source of living.»
In March, the US Congress approved similar legislation, the Taylor Force Act, which suspends some US financial aid to the PA until it stops making payments to prisoners and their families. The act was named after an American killed in an attack by a Palestinian in Israel in 2016.