The decision by Binyamin Netanyahu to order the withholding of Palestinian tax revenues in response to Mahmoud Abbas’s application to join the international criminal court has been sharply criticised by Israel’s president and the US, as well as senior Palestinian figures.

Although Washington remains strongly opposed to last week’s signing by Abbas of the Rome Treaty – which governs the international court of last resort - the Department of State issued a statement condemning the decision to freeze the transfer of $127m (£83m) in tax revenues.

“We conveyed to the Israelis that freezing the tax revenues is an action that raises tensions,” the department spokesman Jen Psaki told reporters at a daily briefing on Monday. “We oppose any actions that raise tensions and we call on both sides to avoid it.”

Psaki, however, also said it was within the power of Congress – where, from Tuesday, both houses will be led by the Republican party – to order cuts in the $440m aid the US sends to the Palestinian Authority if it continued with moves to join the court. That follows the passing of legislation in Congress making US aid dependent on the Palestinian territories not joining the ICC.

Israel’s move was also denounced in a strongly worded letter to the UN security council by the Palestinian ambassador to the UN, Riyad Mansour, who described it as “blatant theft and an act of collective punishment”.

The Israeli president, Reuven Rivlin, also denounced the move at a closed-door meeting with Israeli ambassadors.

In remarks widely reported in the Israeli media, Rivlin said: “Freezing the transfer of Palestinian tax funds does not benefit us and does not benefit them. Using these funds, the Palestinians sustain themselves and [keep] the Palestinian Authority functioning. Israel’s interest is a functioning PA.”

Those opposed to both the withholding of the tax revenues and US aid say the funds are used largely to pay civil servants and police officers and that any long-term punitive financial measures could ultimately lead to the collapse of the Palestinian Authority. About 25% of the authority’s $4bn annual budget comes from international aid.

Theoretically, Arab countries, including Saudi Arabia, could make up the shortfall, but Arab donors have not always followed through on their funding promises.

Although Israel has frozen the tax revenues before and quietly backed down, it was not clear how long the current freeze might last in the midst of a long election campaign that will see Israeli voters go to the polls in mid-March.