The Palestinian Authority is trying to stop Palestinians using Israeli mobile phone cards sold illegally in the West Bank, a practice which it says robs domestic operators of $100 million annually.
"Any store or place or company or dealer caught (selling Israeli sim cards) will be prosecuted," Telecommunications Minister Mashour Abu Daqqa told reporters.
The Ministry says Israel's four mobile phone operators have a market share of 12 percent in the West Bank although they do not pay license fees or taxes to the Palestinian Authority.
The four companies, Cellcom Israel, Partner, Pelephone and MIRS, are effectively competing unfairly with local Palestinian operators Wataniya Palestine and Jawwal, it says.
Israel, which occupied the West Bank in a 1967 war, controls the airwaves of the territory, home to 2.5 million Palestinians. The West Bank is also home to some 300,000 Israelis living in settlements that rely on Israeli phone networks.
The move poses no threat to Israeli mobile transmitter masts installed in the West Bank under Israeli army control.
Abu Daqqa said Israeli SIM cards were popular with Palestinians partly because of the 3G services they offer.
The Palestinian Authority has asked Israel for a wider spectrum of frequencies that would allow Wataniya and Jawwal to offer 3G services like their Israeli peers. But Israel has so far refused to grant them.
Israeli Infrastructure Minister Uzi Landau said the Palestinian move went against the spirit of peace-making.
"If this would be just a limited, isolated decision, fine, ok, then they decided to do this. But ... this simply means that they are not looking for peace, that they are looking to keep tension and getting themselves more and more disconnected from us and from possible negotiations towards a solution."
Palestinian President Mahmoud Abbas banned this week trade in goods made in Jewish settlements, to highlight the illegality of the enclaves on land Palestinians aim to build a state on.
Abu Daqq said the situation was simply a form of "economic colonization" which was lucrative for the Israelis, whereas Palestinian mobile phone companies are not able to do the same sort of trade in Israel.
Some Palestinians have no choice but to use Israeli networks because of the problems Wataniya and Jawwal face erecting masts in the 60 percent of West Bank territory under full Israeli military control, where the Palestinians have no authority.
The Palestinian mobile phone market, which comprises 4 million people in the West Bank and Gaza Strip, has a penetration rate of around 58 percent. The Palestinian Authority plans to license a third operator in 2013.
Wataniya, part owned by Qatar Telecommunications Co began operating in November and has 200,000 users. Jawwal has seen its user base grow to 2 million since 1999. It is owned by the Palestine Telecommunications Co.