The online edition of Haaretz daily, citing an unidentified Israeli official, said on Saturday the move involves $127m in VAT and customs duties on goods for the Palestinian territories that pass through Israel.

"The funds for the month of December were due to pass on Friday, but it was decided to half the transfer as part of the response to the Palestinian move," the Israeli official told Haaretz.

The Palestinians delivered to the UN headquarters in New York on Friday documents on joining the Rome Statute of the ICC and other global treaties, saying they hoped to achieve "justice for all the victims that have been killed by Israel, the occupying power".

The ICC looks at cases of severe war crimes and crimes against humanity such as genocide.

Saeb Erekat, chief negotiator for the Palestine Liberation Organisation, told Al Jazeera the Israeli retaliation showed that the country was scared over the Palestinian application to join the ICC.

"Israel collects our customs and our taxes for us, so when they withhold these funds, it means that this month people will not be able to pay for their schools, hospitals, medical supplies, milk and bread," he said.

"They [Israelis] are trying to suffocate the whole [Palestinian] nation.

"It shows that when it comes to enforcing collective punishment, they are punishing four million Palestinians, starving them, because they want to act with impunity.

"This shows the legitimacy of what we are doing at the ICC."

Israel has delayed payments to the Palestinians to signal its displeasure in the past, including in 2012 after the Palestinians won a November 29 UN vote recognising Palestine as a non-member state.