Israel is weighing its options for further punishing Palestinians after freezing millions in tax revenues as a first response to their attempt to join the International Criminal Court.

Palestinian leaders responded to the tax freeze by accusing Israel of trying to starve their people as a form of mass punishment.

The Palestinian move to join the Hague-based court sets the scene for potential legal action against Israel for war crimes, in a bid to put pressure on Israel to pull out of the territories.

But the request to join the court, formally presented on Friday, angered Israel which quickly moved to freeze the transfer of $127m in tax revenues to the Palestinian Authority (PA).

"The Palestinian Authority has chosen to take a path of confrontation with Israel, and we will not sit idly by," Benjamin Netanyahu, Israeli prime minister, told cabinet ministers on Sunday, pledging to put up a vigorous defence of Israel's soldiers.

"We will not let Israel Defence Forces soldiers and officers be dragged to the International Criminal Court in The Hague."

Saeb Erekat, Palestinian chief negotiator, denounced the freezing of the transfer as "piracy", yet Israeli officials warned it was only the first in a series of punitive steps.

"If the Palestinian Authority doesn't take a step back, I think we have to take much more severe steps," Yuval Steinitz, strategic affairs minister and a close associate of Netanyahu, said, referring to a "gradual dissolution" of the PA.

"We should not aid the existence of this authority."

No new homes planned

Israel may also file countersuits against senior Palestinian officials, a source close to the government said on Friday.

However, in an unusual development, Israel was not planning to announce any new settlement construction in the settlements, a senior Foreign Ministry official said on Sunday.

Nissim Ben Sheetrit told Israeli diplomats serving in Europe that Israel's response would be "harsher and more comprehensive" than just freezing the taxes, but would not include settlement announcements, Emmanuel Nahshon, a ministry spokesperson, told AFP news agency.

"Israel is about to switch from defence to attack mode," Nahshon quoted Sheetrit as saying, confirming comments first published by the Israeli daily Haaretz's website.

After the Palestinians won the upgraded UN rank of observer state in November 2012, Israel froze the tax funds and also announced plans for 3,000 homes in a highly sensitive area of the West Bank, as well as in annexed East Jerusalem.

Against this backdrop of Israel-PA tensions, workers of public hospitals in the Gaza Strip went on strike on Sunday to highlight demands that they say are not being fulfilled by the Palestinian unity government.

Medical staff in all public hospitals in the Palestinian territory observed the strike in protest against not receiving their monthly salaries for more than seven months, said Ashraf al-Qedra, spokesperson for the Palestinian Health Ministry in Gaza.

He sounded a warning about the one-day protest's possible impact on medical services provided to citizens.