Israel will reduce monthly transfers of tax collected on behalf of the Palestinians in what aides to Prime Minister Benjamin Netanyahu describe as a response to the killing of two Israelis in Palestinian attacks in the occupied West Bank this week.
The amount deducted from about $US130 million ($A174.48 million) sent to the Palestinian Authority each month will be equal to stipends it pays militants in Israeli prisons and the families of jailed or slain militants, Netanyahu's office said on Friday.
"Incitement and payouts to terrorists and their relatives constitute an incentive to murder," it said in a statement.
Palestinian gunmen killed an Israeli and wounded three others in an attack on a family car in the West Bank on Friday, the Israeli army and medics said.
On Thursday, a Palestinian stabbed a 13-year-old girl to death in a West Bank settlement.
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Palestinian officials did not immediately respond to the Israeli statement, which did not say how much cash would be cut.
Under interim peace deals from the 1990s, Israel collects tax on behalf of the PA, which exercises limited self-rule
The revenues are crucial to running the PA and paying public-sector salaries.
Israel withheld tax money in 2012 and last year in response to Palestinian moves for statehood recognition abroad.
