“It must be made very clear, we are not going to transfer funds which could finance terrorist attacks against our civilians,” Olmert said on public radio.

Two million shekels (35 million dollars) were due to be handed over to the Palestinian Authority on Wednesday.

The action came after the radical Islamist Hamas group’s stunning election victory in Palestinian legislative elections last week.

Hamas, responsible for most of the anti-Israeli suicide attacks during the current Palestinian intifada, or uprising, has refused to disarm and espoused the destruction of Israel as part of its charter.

The blocked funds essentially correspond to sales tax revenues and customs duties levied on imported products coming into the Palestinian territories and transitting Israel.

Olmert made his statement following a meeting with German Chancellor Agela Merkel, who was on a two-day visit to Israel and the Palestinian Territories.

The European Union was to seek on Monday to hammer out a response to Hamas’s shock election win, amid a blunt warning the bloc could cut huge aid payouts if the new Palestinian leadership threatens Israel.