Israeli Prime Minister Benjamin Netanyahu's inner cabinet decided on Tuesday to speed up construction in east Jerusalem and in nearby settlements, a day after UNESCO's general assembly voted Palestine in as a full member.
"These measures were agreed... as punishment after the vote at UNESCO," a senior government official told AFP on condition of anonymity.
"We will build 2,000 housing units, including 1,650 homes in east Jerusalem and the rest in the settlements of Maaleh Adumim and Efrat," he added, referring to a sprawling settlement east of Jerusalem and another between Bethlehem and the southern city of Hebron.
"It was also decided to temporarily freeze the transfer of funds to the Palestinian Authority," he added.
Every month, Israel transfers to the Palestinian Authority tens of millions of dollars in customs duties levied on goods destined for Palestinian markets that transit through Israeli ports. The money constitutes a large percentage of the Palestinian budget.
Israel often freezes the transfer of funds as a punitive measure in response to diplomatic or political developments viewed as harmful.
A statement from Netanyahu's office said the decisions were taken during a "first discussion" of the UNESCO issue. Further steps would be considered at the next meeting of the so-called Forum of Eight senior ministers.
The Palestinians' presidential spokesman Nabil Abu Rudeina reacted angrily.
He called on the Middle East Quartet and the US administration to "put an end to this recklessness" which he warned would have "negative consequences" for the whole region.
"The Israeli decision to speed up settlement construction with the construction of 2,000 new housing units is an Israeli decision to accelerate the destruction of the peace process," he told AFP.
"And the freezing of funds is stealing money from the Palestinian people."
The Palestinian request for UNESCO membership was approved by the UN cultural organisation's general assembly at a vote in Paris on Monday, despite strong opposition from the United States and Israel.
The move was also likely to cost UNESCO its US funding, which makes up 22 percent of its budget, because US law requires Washington to cut funds to any UN organisation that admits Palestine as a full member.
And Canada announced Tuesday that it would not contribute any extra money to UNESCO to make up for any shortfall from the US cut.
"Canada is deeply disappointed by the decision taken by UNESCO," Foreign Minister John Baird told reporters. "As a result of this decision, Canada has decided to freeze all further voluntary contributions to UNESCO."
But Canada's regular annual $10 million contribution to UNESCO would not be withdrawn, he added.
Israel is also reportedly considering withdrawing the special permits granted to top Palestinian officials that allow them to move between the West Bank and Israel with relative ease.
And servers providing Internet connections to Palestinians across the West Bank and Gaza Strip lost all Internet access Tuesday after a cyber-attack.
Palestinian communications minister Mashur Abu Daqqa told AFP he suspected Israeli involvement.
Netanyahu has denounced the UNESCO decision as yet another Palestinian attempt to seek "a state without a deal".
"We won't sit around idly in the wake of these moves that harm Israel and are a crude violation of the most elementary commitment the sides took upon themselves in the peace process -- to solve the conflict between us through negotiations only," he said on Monday.
Winning membership in UNESCO will allow the Palestinians, who previously held observer status at the organisation, to apply to classify natural and cultural sites as World Heritage Sites.