Israeli prime minister Benjamin Netanyahu has been put increasingly on the defensive amid a narrowing of the polls

Israel’s government on Friday released tax revenues it had been withholding since January to punish the Palestinians for their decision to join the International Criminal Court.

The government of Benjamin Netanyahu, who won re-election last week after a controversial and divisive campaign, and is negotiating with far-right and religious parties to form a coalition, said it made the decision on the recommendation of military and security officials.

“Given the deteriorating situation in the Middle East, one must act responsibly and with due consideration alongside a determined struggle against extremist elements,” Mr Netanyahu said in a prepared statement, released late in the afternoon as Israelis were preparing for Shabbat.

Israel said the decision was made “based on humanitarian concerns and in overall consideration of Israel’s interest at this time”. It said it would be transferring tax revenues accrued up until February, but subtracting the cost of services rendered to the Palestinians, including electricity, water and hospitalisation.

The Netanyahu government’s decision in January to stop transferring the tax and customs receipts, worth about $125m a month, tipped the Palestinian Authority, the West Bank’s biggest employer, into a financial crisis, forcing it to borrow heavily from local banks and raising fears that the governing body could be pushed to collapse.

Teachers, policemen, and other civil servants were given a 40 per cent pay cut and security services resorted to buying petrol and groceries on credit because of the cash squeeze.

Jihad al-Wazir, the Palestinian central bank governor, told Reuters this week that his institution had told the Palestinian Authority that it had reached limits permitted to it, and that banks would no longer be able to fund it.

The Palestinians are expected to join the ICC in a ceremony at The Hague on April 1, opening the way for possible cases against Israel for alleged war crimes and crimes against humanity committed since last summer in the Gaza Strip and occupied West Bank.

The court is said to be studying Israel’s military operation against the Islamist group Hamas in Gaza last July and August, and actions by Israeli officials relating to Jewish settlements in the occupied West Bank.

Israel’s withholding of the money, on which it collects a 3 per cent administrative fee, prompted the Palestinians to retaliate by threatening to end security co-operation with the Israelis, an arrangement in place since the signing of the Oslo Accords that had helped to keep the West Bank relatively quiet in recent years.

The Palestinians face further pressure on their finances after a New York court ordered them to pay $218.5m in a suit brought by 10 US families of civilians, including American citizens, killed in violent attacks during the second intifada against Israel in 2002-4.

The damages are due to be tripled to more than $650m under a US antiterrorism law, and the Palestinians are appealing against the court’s decision.

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