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On Monday, Defense Minister Ehud Barak called during a meeting of the inner cabinet for the immediate transfer of the tax revenues whose transfer to the Palestinian Authority was suspended two weeks ago in response to the admission of Palestine to UNESCO. Barak said the money belonged to the Palestinians and that its continued withholding was exacerbating tensions between Israel and the PA; but his position was rejected, and the inner cabinet decided not to release the funds.

The decision was the result of a last-minute reversal in the position of Prime Minister Benjamin Netanyahu, who, until Monday morning, had reportedly been leaning toward recommending that the money be freed.

About two weeks ago, after Palestine was admitted to the United Nations Educational, Scientific and Cultural Organization as a full member, the forum of eight senior cabinet ministers decided on several punitive measures against the PA. One involved withholding from the Palestinians $100 million in tax revenues that Israel had collected on behalf of the PA in October, under a provision in the Oslo Accords. The Palestinians need the money to pay the salaries of members of the PA security forces.

Israel's military establishment opposed the move on the grounds that it could destabilize the security situation in the West Bank.

Many international figures also lobbied the Prime Minister's Office with requests to release the money, which belongs to the Palestinians. On Monday morning, shortly before the inner cabinet convened, Quartet representative Tony Blair met with Netanyahu and asked him to expedite the transfer, saying that release of the revenues is an obligation and serves the interests of both sides.

"This is Palestinian money that is vital and necessary for the PA to continue functioning and providing services to Palestinians," Blair was quoted as saying.

Blair, as well as senior finance and defense ministry officials, said before the meeting that they were sure the ministers would approve the payment. PMO and Foreign Ministry officials had even signaled the move to a number of countries in recent days.

During the meeting of the inner cabinet that followed, Barak said the funds originated from Palestinian economic activity and should be "transferred to them without delay and without setting conditions, which at present would not contribute to defusing the tension." He said there were wiser courses of action to take with the Palestinians that could help to revive the negotiations and create greater understanding for Israel on the part of its friends in the international community.

"The wider political context should be examined," Barak continued. "Attention must be paid to the changes in the region, and after thorough discussion, a decision should be made on practical steps to take.

"We must aspire to reducing friction in a place where it is superfluous, and defusing the tension with the international community while encouraging the moderate forces in the region," the defense minister said.

The mood in the meeting, however, was against the change. Both Finance Minister Yuval Steinitz and Foreign Minister Avigdor Lieberman argued fiercely against releasing the funds. Barak and Israel Defense Forces officers who attended the meeting tried in vain to persuade the ministers.

As the meeting wound down it became apparent that Netanyahu had changed his mind about submitting the matter to a vote. The ministers ended their discussion by deciding not to decide, effectively extending the freeze of the funds until the inner cabinet convenes again - presumably next week.

Senior officials in Jerusalem cite two factors in Netanyahu's reversal. The first was the opposition of Steinitz, Lieberman and other ministers. The second was the pessimistic report he received shortly before the inner cabinet meeting from his envoy Isaac Molho, who had just met with visiting Quartet representatives and who told the prime minister that the Palestinians had hardened their positions regarding the renewal of peace talks.

"It's unfortunate that the Palestinians continue to hold on to their old position, in an attempt to fool the international community into believing they are willing to negotiate with Israel while on the ground they continue to present preconditions," sources in the PMO said.