Israeli Finance Minister "Yair Lapid" has decided to suspend the transfer of public funds to West Bank settlements pending a probe into their alleged misuse, his office said.
The move announced late Saturday was not expected to affect controversial plans for settlement expansion, which the Palestinians view as a major obstacle to US-backed peace talks relaunched last year.
Lapid's move came after he was informed that "funds were allegedly transferred from settlements to the Yesha Council," which represents Israelis living in the West Bank, a statement late Saturday read.
West Bank settlements receive compensation following the 10-month construction freeze of 2009-2010, which came as part of US-led peace efforts.
The funds were intended for security and the maintainance of schools and kindergartens.
But after it emerged the funds were "allegedly being illegally channelled to the Yesha Council, which was using the money for political activities -- including against the government -- the minister ordered to immediately cut the future fundings under this clause," the statement read.
The minister has ordered an investigation into the matter, it added.
According to the Israeli anti-settlement think-tank Molad, the government has already transferred 148 million shekels ($42 million, 31.5 million euros) to West Bank settlements as compensation to make up for property taxes not collected on structures not built.
Lapid's decision comes amid an upsurge in the international campaign to boycott settlements, which are considered illegal under international law.
US actress Scarlett Johansson on Thursday stepped down as ambassador for British NGO Oxfam after it had criticised her for promoting the Israeli firm SodaStream, which has a factory in a settlement east of Jerusalem.