Under interim peace deals, which Israel says the Palestinians violated by unilaterally seeking an upgrade of their status at the United Nations, it collects about $100 million a month in duties on behalf of the authority.
But, Israeli officials said, the authority owes about $200 million to the Israel Electric Corporation, and that money will now be deducted from the tax transfers.
The cash-strapped authority, which exercises limited self-rule in the occupied West Bank, largely depends on the tax money to pay civil servants' salaries. Yasser Abed Rabbo, a senior Palestinian official, said Israel was guilty of "piracy and theft" by refusing to hand over the funds.
Israel has previously frozen payments to the body 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.
"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 Palestinian Authority owes to the Israel Electric Corporation and other bodies," Finance Minister Yuval Steinitz said on Israel Radio.
The U.N. victory for the Palestinians was a diplomatic setback for the United States and Israel, which were joined by only a handful of countries in voting against upgrading the Palestinians' observer status at the U.N. to "non-member state", like the Vatican, from "entity".
Hours after the U.N. vote, Israel said it was authorising 3,000 new settler homes in the West Bank and East Jerusalem and expediting planning work for thousands more dwellings in a geographically sensitive area close to Jerusalem, which critics said would kill off Palestinian hopes of a viable state.
The United States said the expansion plan, which also drew strong European criticism, was counterproductive to the resumption of Israeli-Palestinian peace talks frozen since 2010.