Israeli ministers are threatening a broad range of economic and political sanctions against the Palestinians in response to their high-stakes campaign to seek full UN membership.
Israeli Prime Minister Benjamin Netanyahu and his government strongly oppose the Palestinian bid to seek UN membership for a Palestinian state on the lines that existed before the 1967 Six Day War.
But some Israeli officials are pushing for the government to take harsh measures in response to the bid.
Foreign Minister Avigdor Lieberman has warned of "tough and serious consequences" and has even raised the idea of cancelling key agreements signed between the two sides.
In particular, he has suggested the Palestinian bid could mean the end of the economic cooperation as agreed in the 1994 Paris Accords, under which Israel transfers Palestinian tax and tariff funds to the Palestinians.
The funds collected and transferred by Israel amount to about 60 million euros ($82 million) a month and represent about two-thirds of the funds for the Palestinian budget.
Without the payments, the Palestinian Authority would quickly lose its ability to pay its 150,000 employees, and the government would effectively be paralysed.
Danny Ayalon, Israel's deputy foreign affairs minister, also alluded to the potential financial consequences of the UN bid at a Palestinian donors' conference which he attended on Sunday at the United Nations.
"Future assistance and cooperation could be severely and irreparably compromised if the Palestinian leadership continues on its path of essentially acting in contravention of all signed agreements which also regulate existing economic relations," he said.
"Israel will have absolutely no obligations towards a so-called Palestinian state, especially one created artificially in this building," he warned.
Finance Minister Yuval Steinitz has also advocated punitive financial measures against the Palestinians.
"They want to establish a state without peace, without security, without putting an end to the conflict, without recognising the state of Israel, without the slightest engagement," he declared last month.
"This is our worst nightmare, and it comes with a price."
Another bloc of Israeli ministers has petitioned for the Jewish state to respond to the UN bid by authorising massive new settlement construction in the West Bank.
Such a move would be backed by cabinet minister and vice premier Moshe Yaalon, Haaretz newspaper reported on Monday.
"As far as the Palestinian Authority gets in the United Nations, that's how far our response should go," the paper quoted him as saying.
Others in Netanyahu's predominantly right-wing government have called for Israel to annex the entire West Bank, including areas currently under the control of Abbas's Palestinian Authority.
Danny Danon, an MP with Netanyahu's Likud party, said the Jewish state must respond in kind to the Palestinian bid.
"Israel must prepare an appropriate unilateral reaction and declare sovereignty in Judaea and Samaria to ensure the future security of Israel," he said, using the biblical name for the West Bank.
Netanyahu has so far declined to spell out any precise measures that may be taken against the Palestinians, and an government official on Monday said the premier was biding his time.
"For the moment, Benjamin Netanyahu is letting Avigdor Lieberman and the other ministers talk, but nothing has been decided," said the official, who spoke on condition of anonymity.
He said that Washington and the European Union have "made it clear that they oppose any economic sanctions."
Israeli media reports suggest Netanyahu's cabinet is divided on imposing punitive measures, with Haaretz saying Defence Minister Ehud Barak and Intelligence Minister Dan Meridor oppose sanctions for pragmatic reasons.
The two argue that provoking the economic collapse of the Palestinian Authority risks plunging the West Bank into chaos that could result in new violence against Israel as well as international criticism, Haaretz said.