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A top Palestinian official on Tuesday strongly denounced a new Israeli law that will freeze money transfers to the Palestinian Authority to punish its payments to families of those jailed for attacks.

Saeb Erekat, secretary general of the Palestine Liberation Organisation, said the move threatened the existence of the cash-strapped Palestinian Authority.

The legislation was approved late on Monday and gives the Israeli government powers to withhold an amount of money based on what is paid to the prisoners and their families by the PA.

Israel collects around $127 million a month in customs duties levied on goods destined for Palestinian markets that transit through Israeli ports and then transfers it to the Palestinian Authority.

"This is a very dangerous decision that amounts to the cancellation of the Palestinian Authority and is piracy and theft," Erekat told AFP.

"Israel is stealing the land and money of the Palestinian people and that is a result of the decisions of President Trump, who supports Israel."

A sponsor of the legislation says the PA pays around $330 million a year to prisoners and their families, amounting to seven percent of its budget.

US legislation that became law in March also withholds some aid to the Palestinian Authority over the payments to prisoners' families and the families of those killed while carrying out attacks. 

The law, known as the "Taylor Force Act," is named after a US military veteran and graduate student who was killed in a 2016 attack while he was visiting Israel.

Israel says the payments to the families of Palestinians jailed for security offences or killed by Israeli forces while carrying out attacks encourages further violence.

Many Palestinians view the prisoners and those killed while carrying out attacks as heroes or "martyrs" in the struggle against Israeli occupation.

The payments can be a key source of income for families, who have in many cases lost their main breadwinner.

Israeli Defence Minister Avigdor Lieberman hailed the passing of the new law, saying: "Every shekel (President) Mahmoud Abbas will pay for terrorists and assassins will be automatically withdrawn from the Palestinian Authority's budget. 

"An effective war on terrorism also passes through the pocket - of the terrorists, of their families and of Mahmoud Abbas."

Israel has withheld payments in the past, notably in response to the Palestinians' 2011 admission to the UN cultural agency UNESCO as a full member.

The Palestinian Authority, which has limited sovereignty in parts of the occupied West Bank, relies heavily on outside financial aid.

It is also facing what is sees as blatant bias from Trump's administration and froze relations with the White House after it recognised Jerusalem as Israel's capital last year.