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G7 finance ministers urged Israel Saturday not to disrupt "vital financial transactions" in the occupied Palestinian territories, following indications it could cut off Palestinian banks.

"We call on Israel to take the necessary measures to ensure that correspondent banking services between Israeli and Palestinian banks remain in place, so that vital financial transactions and critical trade and services continue," read the final statement following the talks in Italy.

The G7 ministers who had gathered in Stresa for the two-day finance summit also urged Israel "to release withheld clearance revenues to the Palestinian Authority, in view of its urgent fiscal needs".

And they asked Israel "to remove or relax other measures that have negatively impacted commerce to avoid further exacerbating the economic situation in the West Bank".

US Treasury Secretary Janet Yellen had on Thursday expressed concern at Israel's "threats" to cut off Palestinian banks from their Israeli correspondent banks.

Israeli Finance Minister Bezalel Smotrich said Wednesday he planned not to renew a vital arrangement between financial institutions, which is due to expire within weeks.

Yellen warned of the eventual risk of a "humanitarian crisis" were this to happened, and said she had raised her concerns with Israel.

"These banking channels are critical for processing transactions that enable almost $8 billion a year in imports from Israel, including electricity, water, fuel, and food," she said.

They also facilitate "almost $2 billion a year in exports on which Palestinian livelihoods depend".

Smotrich also threatened to stop transferring tax funds to the Palestinian Authority and to end Norway's role in facilitating the transfers.

Under peace agreements brokered in part by Norway in the 1990s, Israel collects money for the Palestinian Authority, which exercises limited autonomy in parts of the West Bank.

But Israel has blocked transfers since shortly after the October 7 attacks by Hamas, which runs the Gaza Strip.

Smotrich's threat came after Norway joined Ireland and Spain earlier this week in recognising a Palestinian state.

The Israeli cabinet this year approved a plan to transfer to Norway tax funds designated for the Palestinian Authority for its staff in Gaza.

Some Israeli officials, especially far-right ministers like Smotrich, have called for stopping the fund transfers out of concern that they could be utilised by Hamas, which Israel is fighting in Gaza over the October 7 attacks.