The Israeli government on Thursday suspended Middle East talks and threatened to impose new sanctions against the Palestinians in response to a unity agreement between rival Palestinian factions, pushing an embattled U.S. peace initiative to the brink of collapse.

Israel's Security Cabinet made the decision during a six-hour emergency meeting convened to discuss the Palestinian deal, which was announced Wednesday by Palestinian factions Hamas and Fatah as part of a reconciliation plan meant to end their seven-year rift. The deal envisions a unity government within five weeks and elections six months later.

Israel objects to any form of participation in Palestinian politics by Hamas. The Islamist group is currently in charge of the besieged Gaza Strip, which is territorially separate from the West Bank, where Palestinian President Mahmoud Abbas exercises limited self-governance under the auspices of the Palestinian Authority. Hamas is designated as a “terrorist” organization by the United States and European Union for numerous fatal attacks against Israelis over the years.

Thursday's decision was the latest — and perhaps final — blow to the negotiation process led by U.S. Secretary of State John Kerry for the past nine months.

Speaking at the State Department on Thursday, Kerry acknowledged the roadblock in talks but said he remained resolute on continuing negotiations.

"We believe it is the only way to go, but right now it’s obviously at a very difficult point and the leaders themselves have to make decisions, it’s up to them," he said.

The negotiating period had been scheduled to expire next Tuesday. After nine months of fruitless talks, the sides had been meeting in recent weeks in hopes of extending the negotiations.

In a statement issued by Israeli Prime Minister Benjamin Netanyahu's office, the government said it would not hold negotiations with a government that "leans on Hamas."

"Instead of choosing peace, Abu Mazen made a pact with a murderous terrorist organization that calls for the destruction of Israel," it said, using Mahmoud Abbas' nickname. "The alliance between Abu Mazen and Hamas was signed while Israel was making efforts to promote negotiations with the Palestinians ... He who chooses Hamas' terror does not want peace."

The statement also said Israel will respond to Abbas' recent decision to join 15 international conventions "with a series of steps," language that typically refers to financial sanctions against the Palestinians.

Israel has already halted transferring tax and customs money it collects on the Palestinians’ behalf, worth some $100 million a month. Those funds help keep Abbas' self-rule government afloat.

Abbas won assurances in recent Arab League meetings that Arab countries would pay $100 million to the Palestinian Authority if Israel freezes the monthly transfers. However, some of the Arab donor countries have in the past not met their aid commitments.

Saeb Erekat, the chief Palestinian peace negotiator, said Palestinian reconciliation is an internal matter.

"Israel had no right to interfere in this issue," he said. He condemned any possible Israeli sanctions as "piracy," saying the tax revenues are Palestinian money.

Al Jazeera and wire services