But an Israeli official said it was a one-off measure to ease the financial crisis faced by the Palestinians and was not a sign that the transfers would be renewed.
"This decision was taken by Prime Minister Benjamin Netanyahu because of the Palestinian Authority's very difficult financial situation," an official at the premier's office told AFP.
"But this transfer is temporary and affects only funds owed for one month," he added, speaking on condition of anonymity.
"The prime minister did not commit to continue these transfers."
Every month, Israel transfers some NIS 460 million shekels ($120 million) before deductions, but halted the transfers in early December.
In announcing the move, Israel's finance ministry said the monies were being kept to offset Palestinian debts to Israel's electricity company which total around NIS 800 million shekels ($209.7 million).
But Wednesday's decision to release some of the money was denounced by the Palestinians as effectively "extortion."
"Israel's announcement that it will transfer NIS 400 million shekels ($107 million) of our money on a one-time basis means they will continue to carry out extortion on this issue," Palestinian negotiator Saeb Erakat told AFP.
"Israel is using our money, which it collects, as a sword hanging over our heads," he said.
"Israel should pay us our money immediately and the international community should condemn this Israeli piracy and stop it immediately," he added.
"The transfer of the funds on a one-time basis means the financial and political siege is continuing and that nothing has changed in Israeli politics and Netanyahu's approach."
Israel in early December announced it would not transfer tax and tariff funds it collects for the Palestinians in response to their successful bid for upgraded UN membership, a move the Jewish state had fiercely opposed.
Every month, Israel transfers the funds collected in customs duties which are levied on goods destined for Palestinian markets that transit through Israeli ports, and which constitute a large percentage of the Palestinian budget.
The transfers are governed by the 1994 Paris Protocols which governs economic agreements between Israel and the Palestinians.
But Israel often freezes the transfer of funds as a punitive measure in response to diplomatic or political developments viewed as harmful.
The measure has deepened an already dire financial crisis faced by the Palestinian Authority, which has frequently been unable to make payroll for its employees over the last year.
In response to Israel's freezing of the funds, the Palestinians have urged Arab nations to activate a promised "safety net" of $100 million a month to make up the shortfall.
But despite pledging to deliver the money, funds have yet to materialise, leaving the PA unable to pay its thousands of government employees, who are still owed half their salaries from November and all their salaries from December.