The government gave a green light to zoning and planning in the area known as E1 between Jerusalem and Ma’aleh Adumim, but not to actual construction there, Prime Minister Binyamin Netanyahu clarified to his Likud ministers Sunday as condemnations of the move continued to pour into Israel from around the world.

With these comments, Netanyahu – speaking to his Likud ministers before the weekly cabinet meeting – seemed to signal to the Palestinians that if they go further with the type of unilateral actions they took at the UN on Thursday, Israel would indeed build in E1.

The Palestinians claim that building in E1 would cut Jerusalem off from the rest of the West Bank, break up the territorial continuity of a future Palestinian state and sound the death knell to a two-state solution.

Netanyahu also told the ministers that the 3,000 housing units he authorized on Friday would be built in communities in the large settlement blocs, as well as in post-1967 neighborhoods in the capital. A spokesman for the Construction and Housing Ministry said he expected the units to be built in Ariel, Elkana, Efrat, Karnei Shomron and the Jerusalem neighborhoods of Pisgat Ze’ev and Gilo.

Friday’s announcement of the additional units and the planning work to be done on E1 was the government’s immediate reaction to the Palestinians’ successful move to upgrade their status at the UN General Assembly to that of non-member observer state.

On Sunday, Finance Minister Yuval Steinitz announced the second reaction: withholding some NIS 450 million of tax revenue Israel collects each month for the PA.

The withheld funds will be used to pay part of the PA’s NIS 800m. debt to the Israel Electric Corporation.

Steinitz, before Sunday’s cabinet meeting, said Israel made clear that the PA’s move at the UN would not go without a reaction. He said “we would see” about further tax revenue transfers.

No further responses to the PA move are immediately expected, one diplomatic official said.

Palestinian officials in Ramallah Sunday denounced the decision, dubbing it an “act of piracy and blackmail.” They expressed hope that the Arab countries would now fulfill their pledge to provide the PA with $100m. per month to compensate for the loss of the tax revenue.

PLO Executive Committee member Hana Amireh said that Arab League foreign ministers were scheduled to meet on December 9 to discuss ways of supporting the PA in wake of the Israeli decision. Amireh said the decision came as no surprise after the UN vote, but that Israel is now in conflict with not only the Palestinians, but all countries that voted in favor of the statehood bid at the UN.

EU foreign policy chief Catherine Ashton slammed Israel’s announcement regarding E1 and additional construction in the settlements, saying she was “extremely worried by the prospects of settlement expansion on such a scale.”

“The reaction of the international community to any such decision is likely also to be influenced by the extent to which such expansion may represent a strategic step undermining the prospects of a contiguous and viable Palestine with Jerusalem as the shared capital of both it and Israel.”

UN Secretary-General Ban Kimoon also condemned the announcement, saying he learned of it with “grave concern and disappointment.”

Meanwhile, the ambassadors of several key EU countries – Britain, France, German and the Netherlands – sought clarifications over the weekend of the move, and urged Israel to reconsider. The issue is expected to be high on the agenda of talks when Netanyahu meets German Chancellor Angela Merkel in Berlin later this week.

One diplomat said the announcement undercut Israel’s position in those countries that have in the past voted with Israel in international forum, and that this step made it difficult for them to continue doing so.

The official said countries who voted with Israel last year when the Palestinians gained admittance to UNESCO as a state woke up the next day to an announcement of Israeli settlement construction building as a response. That made it difficult to explain their support for Israel to their own citizens, the official said, adding that the exact same phenomenon was repeating itself now.

The official added that the announcement of intent to develop E1 was a particularly severe blow for the Europeans, because it undercut Israel’s credibility in Europe that Israel was indeed interested in a twostate solution.

Netanyahu, meanwhile, opened the weekly cabinet meeting in defense of the announcement about settlement construction by quoting former prime minister Yitzhak Rabin’s response to the notorious 1975 UN vote equating Zionism with racism.

“The response to the attack on Zionism and the State of Israel needs to be to reinforce and underscore the implementation of the settlement plan in all areas where the government decided regarding settlement,” Netanyahu quoted Rabin as saying. “Today we are building and we will continue to build in Jerusalem and in all areas that are on the map of the strategic interests of the State of Israel.”

Netanyahu characterized the PA move at the UN as a “gross violation of agreements that were signed with Israel,” and – as a result – something Israel completely rejected.

“There will be no Palestinian state without an arrangement in which the security of Israeli citizens will be ensured,” he said. “There will be no Palestinian state until the State of Israel is recognized as the state of the Jewish people. There will be no Palestinian state until the Palestinians declare an end to the conflict. Israel will not agree to Judea and Samaria becoming a base for Iranian terrorism, as happened in the areas we evacuated in the Gaza Strip and Lebanon.”

The government formally rejected the UN resolution, unanimously adopting a decision stating that nothing in the UN resolution “changes the status of the areas under dispute” or constitutes “a basis for future negotiations.”