Israel says may hold Palestinian taxes on U.N. bid

By Daniel Bases

NEW YORK (Reuters) - Israeli Finance Minister Yuval Steinitz on Tuesday threatened severe financial ramifications if Palestinian President Mahmoud Abbas makes good on a plan to request U.N. membership for a Palestinian state this week.

Steinitz, a close ally of Israeli Prime Minister Benjamin Netanyahu, said his government could stop collecting the 40 percent of the Palestinian Authority's budget through value added, excise and customs taxes.

"It is my view, there is no (Israeli) government decision, that if the Palestinians violated the very fundamentals of the peace agreement, we should reconsider delivering tax money to them," Steinitz said in an interview with Reuters.

Taxes that Israel collects on behalf of the Palestinian Authority total about 500 million Israeli shekels (85 million pounds) a month, Steinitz said.

Steinitz temporarily stopped the transfer of the tax revenues last spring.

The United States and Israel say a Palestinian state should emerge from peace talks between the Palestinians and Israel, which would be impossible if the Palestinians declare a state on their own. Washington has pledged to veto such a Palestinian request at the U.N. Security Council.

If Abbas makes his unilateral declaration, Steinitz said he hoped the attempt would fail, and he questioned whether the PA could run a stable state in which donations and international aid make up 40 percent of the budget.

"We are worried because of what we saw in Gaza," he said, referring to the withdrawal of Israeli forces from the territory six years ago, after which the Islamist group Hamas took over within two years.