The Palestinian finance minister on Thursday announced salary cuts for civil servants, days after Israel said it would withhold tens of millions of dollars in tax transfers to the Palestinian Authority.
Israel's security cabinet on Sunday approved the freezing of $138 million (122 million euros) over the PA's payments to the families of prisoners, or prisoners themselves, jailed for attacks on Israelis.
Israel, which collects taxes on behalf of the PA, says the payments encourage further violence.
The PA claims they are a form of welfare to families who have lost their main breadwinner.
Palestinian president Mahmoud Abbas said Wednesday he would not accept anything but full payment of the tax transfers owed by Israel.
The PA, which is already running a deficit, will "pay the salaries of civil servants in time, but they will be reduced", said PA finance minister Shukri Bishara after a meeting with EU representatives in Ramallah.
The cuts will not apply to salaries "paid to pensioners and families of martyrs, wounded or prisoners", he added, adding that wages below 2,000 shekels ($550) would also not be affected.
Many Palestinians view prisoners and those killed while carrying out attacks as heroes in their conflict with Israel. Palestinian leaders often venerate them as martyrs.
Under a 1994 agreement, Israel collects around $190 million each month in customs duties levied on goods destined for Palestinian markets that transit through Israeli ports.
The money it then transfers to the PA is the authority's most important source of revenue.
The Palestinians want EU countries to pressure the Israeli government to rescind its decision, said Mahmoud al-Aloul, deputy of Abbas's Fatah party.
Palestinian leaders will take steps to "boycott Israeli goods", he said, adding they had already prepared "a list of Israeli products that have local (Palestinian) equivalents".