JERUSALEM — Israel on Sunday roundly rejected the United Nations' endorsement of an independent state of Palestine, announcing it would withhold more than $100 million collected for the Palestinian government to pay debts to Israeli companies.
It was the second act of reprisal since the U.N. General Assembly voted overwhelmingly on Thursday to support the Palestinians' statehood initiative.
On Friday, Israel announced it would start drawing up plans to build thousands of settlement homes, including the first-ever residential developments, on a sensitive piece of land near Jerusalem. Actual construction would be years away.
Prime Minister Benjamin Netanyahu declared the statehood campaign, led by Palestinian Authority President Mahmoud Abbas, as "a gross violation of the agreements signed with the state of Israel."
"Accordingly, the government of Israel rejects the U.N. General Assembly decision," he said.
Israel, backed by the U.S., campaigned against the statehood measure, arguing that only negotiations can deliver a Palestinian state.
Mr. Abbas returned home Sunday to a hero's welcome in the West Bank city of Ramallah.
Some 5,000 people thronged a square outside his headquarters, hoisting Palestinian flags and cheering. Large posters of the Palestinian leader, whose popularity had plummeted in recent months, adorned nearby buildings.
"We now have a state," he said to wild applause. "The world has said loudly, 'Yes,' to the state of Palestine."
Mr. Abbas warned of "creative punishments" by Israel. Referring to the latest settlement construction plans, he said: "We have to realize that your victory has provoked the powers of war, occupation and settlements because their isolation is deepened."
The U.N. resolution endorsed the Palestinian position that its state includes the West Bank, East Jerusalem and the Gaza Strip, territories captured by Israel in the 1967 Mideast war.
Israel rejects a full pullback to its 1967 borders, and says the resolution is a way to bypass negotiations.
In Sunday's response, Finance Minister Yuval Steinitz said the government would withhold taxes and customs collected from Palestinian laborers and businesses on behalf of Mr. Abbas' Palestinian Authority.
The money will be used to help pay off the authority's debts to Israel, including $200 million owed to the state-run Israel Electric Corp., government officials said.
This month, more than $100 million was to have been transferred. Mr. Steinitz said Israel would decide later whether to withhold future transfers as well.
The General Assembly decision late Thursday to accept "Palestine" as a non-member observer state in the West Bank, East Jerusalem and Gaza did not grant actual independence to the 4.3 million Palestinians living in those areas.
Israel remains an occupying force in the first two territories, and continues to severely restrict access to Gaza. The coastal strip, located on the opposite side of Israel from the West Bank, is controlled by the militant group Hamas. Israel withdrew in 2005.
Mr. Netanyahu sounded defiant Sunday.
"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," he told his Cabinet.
Half a million settlers live in the West Bank and East Jerusalem, the result of a decades-long strategy aimed at blurring the borders between Israel and the occupied territories.
Israel announced Friday that it would press ahead plans to build 3,000 housing units in the West Bank and east Jerusalem, the core of the Palestinians' hoped-for state.
More worrisome for the Palestinians, it vowed to dust off a master plan to build 3,600 apartments and 10 hotels on the section of territory east of Jerusalem known as E1. The Palestinians have warned that such construction would kill any hope for the creation of a viable state of Palestine.
Building there would sever the link between the West Bank and East Jerusalem, the sector of the holy city the Palestinians claim for a future capital, and cut off the northern part of the West Bank form its southern flank.