Israel's security cabinet met on Thursday to weigh its retaliation to a unity deal struck between the Palestinian Authority and Gaza's Islamist rulers Hamas.
Prime Minister Binyamin Netanyahu reacted angrily to Wednesday's agreement between the rival factions accusing PA chairman 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 PA violated the terms of peace talks by applying to join 15 international treaties.
Israel is not expected to order a complete halt to US-brokered peace talks with the PA, 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.
A close aide of Netanyahu, Likud MK Tzahi Hanegbi, said Israel was unlikely to halt the US-brokered peace talks launched in July.
"Israel has no interest in pronouncing dead the dialogue with the Palestinians. It is better that they announce the end of the political dialogue," Hanegbi told public radio.
But Foreign Minister Avigdor Lieberman said that in his opinion an agreement was "impossible" while there is an alliance involving Hamas, a group sworn to the destruction of the State of Israel and whose official charter advocates killing Jews as a religious obligation.
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's Palestinian Authority, which account for some two-thirds of its revenues.
The deal between the Palestinian leadership and Hamas came as the US-led peace talks teetered on the brink of collapse just days before their scheduled April 29 conclusion.
US envoy Martin Indyk has held repeated meetings with the two sides in a last-ditch bid to salvage the negotiations.
PA 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 all building in Jewish communities in Judea and Samaria, including parts of Jerusalem, and frees the last batch of convicted terrorists due to be released this month, but which were cancelled after the PA signaled it would be walking away from talks.
He has also demanded the two sides launch straight into negotiations on the future borders of a future "Palestinian state".
Israel has dismissed all three conditions as unacceptable.
Jibril Rajoub, a leading member of Abbas's Fatah faction, told AFP that "the next national consensus government will proclaim loud and clear that it accepts the Quartet's conditions".
The Middle East Quartet demands that Hamas recognize Israel and existing agreements between it and the PLO (which controls the Palestinian Authority), and renounce armed struggle.
Washington warned Wednesday that the deal between the Palestinian Authority 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's writ has effectively been confined to PA-controlled areas of Judea and Samaria 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 recognised Israel and past peace deals.
Washington reaffirmed that position on Wednesday.