|Mahmud Abbas in Ramallah|
The move came as the PA president, Mahmoud Abbas, returned to cheering crowds in Ramallah in the West Bank following Thursday's vote, in which 138 countries backed enhanced "non-member state" status for Palestine. Only nine countries opposed the move and 41 abstained.
The financial sanction is Israel's second punitive response to the vote. On Friday, it announced a big settlement expansion programme.
An Israeli official said Israel was entitled to deduct the sum from a debt of more than $200m (£125m) owed by the PA to the Israel Electric Corporation. But he conceded that the move was in response to the UN vote, and that it could be repeated next month. "A lot depends on what the Palestinians do or don't do," he said.
The Israeli finance minister, Yuval Steinitz, told Israel Radio: "I do not intend this month to transfer the funds to the Palestinians. In the coming period I intend to use the money to deduct debts the PA owes to the Israel Electric Corporation and other bodies."
A spokeswoman for the PA declined to comment, saying Palestinian officials had not been officially notified of the move. But Yasser Abed Rabbo, a senior Palestinian official, said Israel was guilty of "piracy and theft" by refusing to hand over the funds, according to news agency reports.
Israel had been expected to take punitive measures following the UN vote. A Palestinian official said the withholding of tax revenues was an "act of desperation" in the face of overwhelming international support for a Palestinian state.
In the past, Israel has frozen the monthly revenues as a sanction against the PA, resulting in the late payment of salaries for thousands of public servants in the West Bank and Gaza.
Sunday's decision followed the announcement – within hours of the UN vote – of a big settlement expansion programme, including the controversial development of highly sensitive land close to Jerusalem.
On Friday, Israel said it would build 3,000 new homes in settlements across the pre-1967 Green Line. It also said it would push ahead with the development of an area known as E1, which would close off East Jerusalem – the intended future capital of Palestine – from the West Bank. The announcement drew condemnation from the US and Britain. More