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Palestinian President Abbas returns triumphantly from U.N.
The United States, Britain, France and other European states all denounced the plan.
On Sunday, the Israeli government delivered another blow, saying it would withhold more than $100 million in funds it transfers to the Palestinians each month.
Instead, it said the money — taxes and customs duties that Israel collects on behalf of the Palestinians — would be used to pay off its debts to Israeli companies, including $200 million owed to the state-run Israel Electric Corp., government officials said.
The monthly transfers are crucial for the cash-strapped Palestinian Authority to pay salaries to its tens of thousands of civil servants and security forces. Israel has taken similar measures in the past before eventually releasing the money.
At the weekly meeting of his Cabinet, Mr. Netanyahu said the Palestinian statehood campaign was a “gross violation” of past agreements calling for disputes to be resolved through negotiations.
“Today we are building, and we will continue to build in Jerusalem and in all areas that appear on Israel’s map of strategic interests.”
A half-million settlers live in the West Bank and east Jerusalem. The ongoing growth of the settlements is at the heart of the current impasse in peace efforts.
The Palestinians view continued settlement expansion as a show of bad faith and refuse to return to negotiations unless construction is frozen.
Mr. Netanyahu has claimed that a brief settlement slowdown in 2010 failed to jump-start negotiations, and he has refused calls for a new construction freeze.
The Palestinians have signaled that they may use their upgraded status to join the International Criminal Court and pursue war crimes charges against Israel. But officials say any decision to seek membership in the ICC is likely months away.
Palestinian officials said little was expected to change until Israel holds parliamentary elections on Jan. 22. Public opinion polls suggest Mr. Netanyahu is likely to win re-election at the head of a hard-line coalition.
Palestinian officials said they were hopeful that Mr. Obama would present a comprehensive peace plan after the Israeli vote.
“If there is a meaningful peace process, we will join. If not, then we are taking the Palestinian cause to the international community,” said Husam Zomlot, a spokesman for Mr. Abbas.
The new Israeli settlement construction plans remain far from certain and may have been announced by Mr. Netanyahu to impress voters ahead of the election.
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