Israel has responded to the acceptance of Palestine as a full member of the United Nations Education, Scientific and Cultural Organisation (UNESCO) with a range of sanctions against the Palestinian Authority.
But ministers are split over whether funds to the PA should be cut off.
The resolution to upgrade Palestine to full nation-member status at UNESCO was approved in Paris on Monday by 107 votes to 14. Fifty two countries, including Britain, abstained. The results were expected but Israel was dismayed that close ally France voted in favour.
On Tuesday, the Israeli inner cabinet met to agree a range of responses, chief of which was the authorisation of 2,000 new homes across the Green Line.
The building will be in East Jerusalem, Ma'ale Adumim and the Etzion bloc, areas the government believes will remain in Israeli territory in a future two-state solution.
The government also voted to cancel VIP passes for senior PA officials which allow them to cross IDF roadblocks and border crossings without inspection.
No decision was reached on whether or not to completely stop the transfer of customs taxes that Israel charges on behalf of the PA. Finance Minister Yuval Steinitz was in favour of ending the transfer but Defence Minister Ehud Barak was not. Mr Barak is backed by the IDF and the Shin Bet, which have recommended that Israel continues to support the PA to avoid a security breakdown in the West Bank. For now, though, 300 million shekels of tax money that was to be handed to the PA has been frozen.
Senior Palestinian sources have been hinting that President Mahmoud Abbas is planning to dissolve the PA in response to Israeli and US pressure. But Israeli diplomats insist: "Mr Abbas has been talking about this for over two years, he won't close down his own source of power that quickly."
Following the UNESCO vote, the US announced that it would be freezing $60m earmarked for the organisation.