Prime Minister Benjamin Netanyahu of Israel seems determined to escalate a crisis by retaliating against the Palestinians after the United Nations General Assembly voted to elevate Palestine to observer state status.

Instead of looking for ways to halt a downward spiral, Mr. Netanyahu on Monday defiantly dug in on his plans to build 3,000 more housing units in contested areas East Jerusalem and in the West Bank, and to continue planning a development in the most contentious area known as E1.

Israel also announced that it was withholding $100 million in tax revenues that it has collected from the Palestinian Authority, which is financially strapped. The moves would impose devastating penalties on the only officially recognized representative of the Palestinian people and could doom the chances for a two-state solution because building in the E1 area would split the northern and southern parts of the West Bank. Such measures are puzzling after Israel disparaged the United Nations vote as insignificant.

Some American lawmakers are also in a vengeful mood, threatening to close the Palestine Liberation Organization’s office in Washington, deprive the Palestinians of American aid and withhold financing from United Nations affiliates that accept the Palestinians as members. These actions would only harm Israel and further undermine America’s ability to play a credible mediator in any peace effort.