Hamas leader Ismail Haniyeh is set to meet Monday with Palestinian Authority President Mahmoud Abbas for talks on forming a government.
The talks come one day after Israel called the new Palestinian parliament dominated by Hamas a "terrorist authority." The Israeli Cabinet also ended the monthly transfer of millions of dollars in customs revenue to the Palestinians.
Hamas refuses to recognize Israel's right to exist, and has vowed to destroy the Jewish state.
The funding cut-off drew immediate criticism from President Abbas, who said the Israeli move has left the Palestinian government in a financial crisis.
However, Prime Minister-designate Haniyeh played down the funding cut-off, saying his Cabinet will seek aid from other Arab states to make up for the loss.
Acting Israeli Prime Minister Ehud Olmert said Sunday that Israel will have no contact with the new Palestinian government, and urged the international community to isolate the Palestinians as well.
The Israeli cabinet rejected several more drastic punitive proposals, including an all-out ban on Palestinians traveling through Israeli territory.Some information for this report was provided by AP and Reuters.