Israel collects about $500m a year in VAT, income and other taxes on Mr Arafat's behalf. This covers about 55 per cent of his budget for the two million Arabs of the West Bank and Gaza Strip. An Israeli statement said yesterday's decision was reached following the Palestinians' "partial" co-operation in investigating the bombing and their swift arrest of three car thieves who murdered an Israeli taxi driver last week. The Palestinians have also given Israel samples from a Hamas bomb factory uncovered near Jerusalem. Israeli forensic scientists are now checking whether the explosives were the same as those used in the market attack.
Hanan Ashrawi, a Palestinian Cabinet Minister, accused Mr Netanyahu of continuing to behave like an occupying power. "We are still demanding the release of all the funds and an end to the closure," she said. "These are Palestinian funds. They cannot use our money as a means of intimidation and coercion."
The Israelis insist, however, that the threat of terrorism leaves them with no choice. "We have to fight terror," Moshe Fogel, a government spokesman, said. "We expect the same of the Palestinian authority. At the first sign of cooperation, we have responded in kind."
The Israeli insurance industry is waiting, meanwhile, to see whether co-operation in combating the cross-border trade in stolen cars will continue. The Insurance Agents' Association reported yesterday that 21,448 cars were stolen in the last six months, a 29 per cent increase on 1996. The Association's executive director, Moshe Ben-Eliezer, estimates that thieves will have taken 45,000 vehicles by the year-end.