Israel said on Sunday it has suspended tax transfers to the Palestinians in response to Palestinian Authority President Mahmoud Abbas's bid to forge an alliance with rival Hamas terrorist group who are opposed to peace talks.

A senior Palestinian official in the West Bank condemned the move, saying Israel had no right to withhold Palestinian funds.

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Finance Minister Yuval Steinitz said he had suspended a routine handover of NIS 300 million ($88 million) in customs and other levies that Israel collects on behalf of the Palestinians under interim peace deals.

In an interview on Army Radio, Steinitz said that Israel feared the money would be used to fund Hamas, an Islamist terrorist group that runs the Gaza Strip and whose founding charter calls for the destruction of the Jewish state.

Israel had threatened sanctions last week in response to Palestinian Authority President Mahmoud Abbas's surprise announcement of a unity deal with Hamas that envisages the formation of an interim government and elections.

The tax transfer mechanism provides Abbas's Palestinian Authority, which exercises limited self-rule in the West Bank, with $1 billion to $1.4 billion annually -- two-thirds of its budget.

"If the Palestinians can prove to us ... that there is not a joint fund between the Palestinian Authority and Hamas in Gaza, I believe that we will reconsider the matter," Steinitz said.

"We ask the entire world not to fund Hamas, so we must not do so, even indirectly," he said.

Asked about Israel's decision, Saeb Erekat, a senior Palestinian official, said: "Israel has started a war even before the formation of the government."

Steinitz noted that Israel had withheld the tax revenues in the past, during the second intifada that began in 2000.

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