JERUSALEM - Prime Minister Benjamin Netanyahu on Sunday brushed off world condemnation of Israel's plans to expand Jewish settlements after the Palestinians won de facto UN recognition of statehood.
"We will carry on building in Jerusalem and in all the places that are on the map of Israel's strategic interests," a defiant Netanyahu said at the weekly cabinet meeting.
In another blow to the Palestinian Authority in the West Bank, Israel announced it was withholding Palestinian tax revenues this month worth about US$100 million (S$1.22 million).
Israel said the reason for the move was a Palestinian debt of US$200 million to the Israeli Electric Corporation, an obligation that has existed for some time.
Finance Minister Yuval Steinitz cautioned last month that if the Palestinians went ahead with the UN bid Israel would "not collect taxes for them and we will not transfer their revenues".
Yasser Abed Rabbo, a senior Palestinian official, said confiscation of the tax funds due the cash-strapped Authority, vital to meeting its payroll, was "piracy and theft".
Stung by the UN General Assembly's upgrading of the Palestinians' status from "observer entity" to "non-member state", Israel said on Friday it would build 3,000 more settler homes in the West Bank and East Jerusalem, areas Palestinians want for a future state, along with Gaza.
An Israeli official said the government also ordered "preliminary zoning and planning work" for thousands of housing units in areas including the so-called "E1" zone near Jerusalem.
Such construction could divide the West Bank in two and further dim Palestinian hopes, backed by the United States and other international sponsors of the Middle East peace process, for a contiguous country.
"It would represent an almost fatal blow to remaining chances of securing a two-state solution," United Nations Secretary-General Ban Ki-moon said in a statement on Sunday.
Israeli officials said it could up to two years before any building begins in E1.
At the cabinet meeting, Netanyahu said the "unilateral step the Palestinians took at the UN is a gross violation of previous agreements signed with Israel". The government of Israel, he added, "rejects the General Assembly's vote".
The upgrade, approved overwhelmingly, fell short of full UN membership, which only the Security Council can grant. But it has significant legal implications because it could allow the Palestinians access to the International Criminal Court where they could file complaints against Israel.
Israel's settlement plans, widely seen as retaliation for the Palestinians' UN bid, have drawn strong international condemnation from the United States, France, Britain and the European Union.
"The recognition of Palestine as a state changes a lot of the facts, and aims to establish new ones," Palestinian President Mahmoud Abbas told a cheering crowd in the West Bank city of Ramallah on his return from the United States.
"But we have to recognise that our victory provoked the powers of settlement, war and occupation."