Palestinian leader Mahmoud Abbas says the Palestinian Authority is facing a financial crisis because of Israeli sanctions imposed on the Palestinians' new Hamas-led government.
Abbas spoke hours after Israel's acting Prime Minister Ehud Olmert said the Palestinian Authority is turning into a terrorist body.
Olmert says Israel will have no contact with the Palestinian government and urged the international community to isolate the Hamas-led government. Israel's cabinet also decided to stop 50 million dollars per month of customs payments to the Palestinians.
But the cabinet rejected some more drastic proposals, including an all-out ban on the travel of all Palestinians through Israeli territory.
Hamas' designated prime minister, Ismail Haniyeh, says Israel's sanctions are designed to break the will of the Palestinian people following his group's overwhelming election victory.
Hamas refuses to recognize Israel's right to exist and the group has claimed responsibility for dozens of suicide bombing attacks against Israeli targets.
Meanwhile, Palestinian officials say two members of the militant Popular Resistance Committees have been killed in an Israeli airstrike on the southern Gaza Strip.
Israeli army officials say the two men were trying to plant a bomb close to a security fence that separates Gaza from Israel.