Israeli media reports Israel's Security Cabinet has decided to suspend peace negotiations with the Palestinians in response to a plan by Palestinian rivals Fatah and Hamas to reconcile and form a unity government.
The reports also say that Israel will impose economic sanctions on the Palestinian Authority. The Security Cabinet held a six-hour meeting Thursday to formulate a response to the deal.
Israeli Prime Minister Benjamin Netanyahu had earlier criticized the announcement, saying Palestinian President Mahmoud Abbas, who represents Fatah, is complicating ongoing peace talks.
"Instead of moving into peace with Israel, he is moving into peace with Hamas and he has to choose. Does he want peace with Hamas or peace with Israel. You can have one, but not the other."
Mr. Netanyahu called Hamas a "murderous terror organization that calls for the destruction of Israel." Israel, the United States and the European Union consider Hamas a terror group.
Hamas and Fatah split violently in 2007, and have since divided their people between two sets of rulers.
It remains unclear how this plan would succeed where past attempts have repeatedly failed. It also adds new complications to U.S. efforts to mediate a peace deal between Israel and the Palestinians.
In Washington, State Department spokeswoman Jen Psaki said Washington is "disappointed" by the announcement, and she warned it could seriously complicate peace efforts.
She said "It's hard to see how Israel can be expected to negotiate with a government that does not believe in its right to exist."