The Palestinian Authority has delayed paying its workers this month after Israel withheld tax funds in anger over Palestinian attempts to block upgraded European Union-Israeli ties, officials said on Sunday.
A senior Palestinian official said the aid-dependent Palestinian government in the occupied West Bank had expected to receive tax revenues on June 2 that Israel collects on its behalf and had planned to pay salaries two days later.
"As of today, we have not received the tax money, so we failed to pay the salaries," the official said.
A senior Israeli official said the Finance Ministry had since approved the transfer but would deduct about a quarter of the $78 million payment to cover Palestinian Authority debts to Israeli utilities.
The delay and the deduction, the Israeli official said, came in response to Palestinian Prime Minister Salam Fayyad's lobbying of the European Union against upgrading its relations with Israel.
In a letter to the EU dated May 27, Fayyad accused Israel of "flagrant disregard" of Palestinian rights by continuing to build Jewish settlements in the West Bank and refusing to remove checkpoints which hamper economic development.
'Olmert was very angry'
Fayyad urged the EU not to upgrade its relations with Israel until it "abides by international and human rights laws", including freezing settlement activity.
He also called on the Organization for Economic Cooperation and Development to deny Israel membership because of its continued settlement expansion.
The senior Palestinian government official said the Palestinian Authority "would not be able to pay all salaries if Israel deducts any amount from the Palestinian tax revenues".
The money is the main source of funding for the Palestinian Authority's budget and is used to pay salaries for more than 165,000 government employees in the West Bank and Gaza Strip.
Israel had told Fayyad's government that it was delaying the transfer of the tax funds for technical reasons.
But Prime Minister Ehud Olmert hinted to President Mahmoud Abbas during their last meeting he would tell his finance minister to stop the payments to protest against Fayyad's move.
"Olmert's complaints about Fayyad's letter took up most of the meeting with President Abbas. He was very angry but the president responded that Israel must stop illegal settlement building to give peace a chance and to help Fayyad's economy improve the economy," one senior Palestinian official said.
Last week, Israel announced plans to build nearly 900 new homes in areas of the West Bank.