Israel's security cabinet was to meet on Thursday morning to weigh its response to a unity deal struck between the Palestinian leadership and the Hamas rulers of Gaza.
Prime Minister Benjamin Netanyahu reacted angrily to Wednesday's agreement between the rival factions accusing Palestinian president Mahmoud Abbas of choosing "Hamas, not peace".
Public radio said ministers were likely to announce fresh retaliatory measures on top of a raft of financial sanctions unveiled this month when the Palestinians applied to join 15 international treaties.
They were not expected to order a complete halt to U.S.-brokered peace talks with the Palestinians, however, despite the announcement by a Netanyahu aide of the cancellation of a scheduled meeting on Wednesday evening, the broadcaster said.
Netanyahu's office described the deal between Abbas and Hamas, which opposes all peace talks with Israel, as "very serious".
But it said it was for ministers to decide whether to announce any new measures after Thursday's meeting.
"By tying itself to Hamas, the Palestinian leadership is turning its back on peace," a Netanyahu aide said.
Israel already announced on April 10 that it was freezing the transfer of some 80 million euros ($111 million) in taxes it collects on behalf of Abbas' Palestinian Authority, which account for some two-thirds of its revenues.
The deal between the Palestinian leadership and Hamas came as U.S.-brokered peace talks which opened last July teetered on the brink of collapse just days before their scheduled April 29 conclusion.
U.S. envoy Martin Indyk has held repeated meetings with the two sides in a last-ditch bid to salvage the negotiations.
Palestinian chief negotiator Saeb Erakat denied any three-way meeting has been planned for Wednesday but acknowledged he would meet Indyk on Thursday without the Israelis.
Abbas says he will not extend the negotiations unless Israel agrees to a freeze on all settlement construction in the occupied West Bank, including annexed east Jerusalem, and frees a group of Arab prisoners who had been earmarked for release this month.
He has also demanded the two sides launch straight into negotiations on the future borders of the Palestinians' promised state.
Israel has dismissed all three conditions as unacceptable.
Washington warned Wednesday that the deal between the Palestinian leadership and Hamas threatened to scupper any chance of rescuing the talks.
"It's hard to see how Israel can be expected to negotiate with a government that does not believe in its right to exist," State Department spokeswoman Jen Psaki said.
Abbas' writ has effectively been confined to autonomous areas of the Israeli-occupied West Bank since Hamas evicted his loyalists from Gaza in 2007.
Hamas agreed on Wednesday to the formation of a joint administration under his leadership within five weeks. Similar agreements have been reached in the past, but the latest deal sparked celebration on the streets of Gaza.
When Hamas swept Palestinian parliamentary elections in 2006, the European Union and the United States said they would deal with a government in which it participated only if it renounced violence and recognized Israel and past peace deals.
Washington reaffirmed that position on Wednesday.
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