The Israeli parliament has passed a law to freeze Palestinian Authority money being paid to families of those jailed by Israel or killed while carrying out terror attacks.

The new law, approved by 87 votes to 15 in the 120-seat Knesset, requires the Israeli government to withhold an amount of tax revenue equal to what the Palestinian Authority (PA) pays to “individuals who were involved in terror activity against Israelis and their familes”.

Defence Minister Avigdor Lieberman said of the legislation: "An effective war on terrorism also passes through the pocket of the terrorists, of their families and of [Palestinian Authority President] Mahmoud Abbas."

Since the 1990s, Israel has collected taxes and tariffs levied on goods passing through its territory on behalf of the PA.

The new legislation will see the freezing of part of the £99 million in tax revenues collected by the PA each month. Estimates suggest around 7 per cent of the PA's annual budget is spent on payments to the familes of Palestinians involved in conflict each year.

The PA has claimed the money is for the welfare of prisoners and “martyrs” but Israeli politicians have long argued that it is intended as a sign of support for terrorism.

If Israel’s defence ministry determines that such payments are no longer being made, the frozen money will be returned to the PA.

Chief Palestinian negotiator Saeb Erekat condemned the new law as “piracy and theft.”

Mr Erekat added: "When we signed Oslo Agreement, it was clear to Israel that the Palestinian Authority pays these families, and they never objected.

“Now they are creating a problem just to avoid addressing the real problems, which stems from the Israeli military occupation and building the settlements on our land, not the social welfare money that goes to the families who lost their source of living."

In March, the US Congress approved the Taylor Force Act, which suspends some US financial aid to the PA until it stops making payments to prisoners and their families.