Israel will withhold critical tax revenue and seek ways to bring war crimes prosecutions against Palestinian leaders in retaliation for Palestinian moves to join the International Criminal Court (ICC), Israeli officials said on Saturday.

Palestinian Authority President Mahmoud Abbas announced earlier this week that Palestine seeks to join the ICC in the Hague to pursue war-crimes charges against Israel. The move follows a failed motion last week in the U.N. Security Council to set a 2017 deadline for a Palestinian state to be established in territory occupied by Israel in the war of 1967.

Making a punitive response, Israeli Prime Minister Benjamin Netanyahu decided in consultation with senior ministers on Thursday to withhold the next monthly transfer of tax revenue, totaling some $125 million, an Israeli official told Reuters on Saturday. These tax revenues make up two-thirds of the annual budget of the Palestinian Authority (PA), excluding foreign aid. The funds are critical to running the PA, which exercises limited self-rule, and paying salaries for its public employees.

Saeb Erekat, chief negotiator for the Palestine Liberation Organization, told Al Jazeera that the move showed that Israel was scared over the move to join the ICC. "Israel collects our customs and our taxes for us so then when they withhold these funds it means that this month people will not be able to pay the schools, the hospitals, the medical supplies, the milk and bread, so they are trying to suffocate the whole nation,” Erekat said.

"It shows that when it comes to enforcing collective punishment, they are punishing 4 million Palestinians, starving them, because they want to act with impunity," he added. "This shows the legitimacy of what we are doing in the ICC."

Israel took a similar step in December 2012, freezing revenue transfers for three months in anger at the Palestinians' launch of a campaign for recognition of statehood at the United Nations.

In addition to the revenue freeze, an Israeli official told Reuters that Israel was "weighing the possibilities for large-scale prosecution in the United States and elsewhere" of Palestinian President Mahmoud Abbas and other senior Palestinian officials. Israel would probably press these cases via non-governmental groups and pro-Israel legal organizations capable of filing lawsuits abroad, a second Israeli official said.

Netanyahu had previously warned that unilateral moves by the Palestinian Authority at the U.N. would expose its leaders to prosecution over support for Hamas, viewed by Israel and much of the West as a terrorist organization. Israel sees the heads of the Palestinian Authority in the occupied West Bank as collaborators with Hamas, the party that dominates Gaza, because of a unity deal forged in April, the officials said.

Hamas remains the de facto power in the Gaza Strip and fought a bitter summer war with Israel, which took the lives of 73 Israelis and nearly 2,200 Palestinians, mostly civilians.

According to Israeli government figures, Hamas fired 4,562 rockets during the fighting in July and August, reaching as far as Tel Aviv and Jerusalem.

When asked about the possibility of Palestinian leaders, particularly members of Hamas, being pursued for war crimes, Palestinian Ambassador to the U.N. Riyad Mansour said that the option was "political posturing."

"We are not afraid of the judgment of the law, especially international law," he said, speaking at the U.N. headquarters in New York City on Friday.

There are concerns, however, about whether the move to join the ICC will draw repercussions from the United States. The U.S., Israel's main ally, supports an eventual independent Palestinian state but has argued that moves made unilaterally or through international institutions could damage the peace process.

Washington sends about $400 million in economic support to the Palestinians every year. Under U.S. law, that aid would be cut off if the Palestinians used membership of the ICC to press claims against Israel.

The Palestinians' ICC bid is part of a shift in strategy for the Palestinians, who are seeking to internationalize their campaign for statehood and move away from the stalled U.S.-led negotiation process.

Palestinians seek a state in Gaza, the West Bank and East Jerusalem, lands Israel captured in the 1967 Middle East War. Momentum to recognize a Palestinian state has been building since Abbas succeeded in a bid for de facto recognition at the U.N. General Assembly in 2012, which made Palestinians eligible to join the ICC.

Al Jazeera and wire services