Israel to withhold Palestinian funds until March

JERUSALEM (Reuters) - Israel will withhold tax revenues from Palestinian President Mahmoud Abbas's administration until March at least in response to his statehood campaign at the United Nations, Israel's foreign minister said.

Under interim peace deals, Israel collects some $100 million a month in duties on behalf of the Palestinian Authority (PA) in the occupied West Bank -- money that is badly needed to pay public sector salaries.

"The Palestinians can forget about getting even one cent in the coming four months, and in four months' time we will decide how to proceed," Foreign Minister Avigdor Lieberman said in a speech on Tuesday night.

Israel says Abbas violated previous peace accords by sidestepping stalled negotiations and securing a Palestinian status upgrade in the United Nations last month.

Israel has already withheld the December transfer, saying the money would be used to start paying off $200 million the Palestinians owe the Israel Electric Corporation.

Lieberman, a hardliner in Prime Minister Benjamin Netanyahu's conservative coalition government, said the Palestinians also had another debt with the Israeli water authority that would have to be paid off.

"Israel is not prepared to accept unilateral steps by the Palestinian side, and anyone who thinks they will achieve concessions and gains this way is wrong," he said.

Yasser Abed Rabbo, a senior Palestinian official, said earlier this month that Israel was guilty of "piracy and theft" by refusing to hand over the funds.

The European Union has also criticized Israel for not handing over the cash. "Contractual obligations ... regarding full, timely, predictable and transparent transfer of tax and custom revenues have to be respected," it said on Monday.

Israel has previously frozen payments to the PA during times of heightened security and diplomatic tensions, provoking strong international criticism, such as when the U.N. cultural body UNESCO granted the Palestinians full membership a year ago.

Abbas's U.N. victory was a diplomatic setback for the United States and Israel, which were joined by only seven other countries in voting against upgrading the Palestinians' observer status to "non-member state", like the Vatican, from "entity".

Hours after the U.N. vote, Israel said it would authorize 3,000 new settler homes in the West Bank and East Jerusalem and expedite planning work for thousands more in a geographically sensitive area close to Jerusalem. Critics say this plan would kill off Palestinian hopes of a viable state.

(Writing by Dan Williams; editing by Crispian Balmer)