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Israeli Finance Minister Bezalel Smotrich, under pressure from US Treasury Secretary Janet Yellen, will sign a waiver to extend cooperation between Israeli and Palestinian banks for another month after the cabinet agreed, his spokesman said on Thursday.

Smotrich in June extended a waiver that allows cooperation between Israel's banking system and Palestinian banks in the West Bank, but only for four months until the end of October.

The waiver allows Israeli banks to process shekel payments for services and salaries tied to the Palestinian Authority without the risk of being charged with money laundering and funding terrorism. Without it, Palestinian banks would be cut off from the Israeli financial system.

The move came just days after Yellen and seven foreign counterparts sent Israeli Prime Minister Benjamin Netanyahu a letter warning that the far-right finance minister might be about to cause the collapse of the Palestinian economy.

Smotrich, one the most hardline politicians to serve in an Israeli government, has imposed several demands on Palestinian banks to prevent the unlawful funding of "terrorism".

The US and its allies have been working to meet these demands, and US officials report that the Biden administration had informed Israel last week that Palestinian banks had fulfilled the conditions outlined by Smotrich.

On Wednesday, Germany, France and Britain called for the urgent renewal of correspondent banking services between Israel and the Palestinian Territories for at least one year.

The three European nations, known as the E3, urged Israel to promptly renew reciprocal banking arrangements for at least one year to avert economic collapse in the occupied Palestinian territories.

"Failure to renew would completely suspend cross-border trade, which would be catastrophic for the Palestinian economy," the joint statement said.

It warned that failing to renew would jeopardise regional security and impact both Palestinian and Israeli businesses.

"We urge the Government of Israel to renew the indemnifications without delay for a period of least one year, in line with their obligations under the Paris Protocol," the statement added.

It said that the E3 was committed to collaborating with Israel and the Palestinian authorities to counter terrorism financing, but emphasised that failing to renew indemnifications, or implement another temporary extension, "would be unacceptable" and lead to severe economic harm for both Israel and the West Bank.

"Failure to renew would suspend cross-border trade and be catastrophic for the Palestinian economy," the German foreign ministry said in a post on X on Thursday.