Israel's cabinet has approved sanctions on the Palestinian Authority in response to the takeover of the Palestinian parliament by Hamas.

Before Sunday's cabinet meeting, Israel's acting Prime Minister Ehud Olmert called the new Hamas-led legislature a "terrorist authority" and said that all funds to it must be stopped.

Israel "won't have contacts with a government in which Hamas takes part," Olmert added.

The decision means Israel will halt the transfer of about $50 million in taxes it collects monthly on behalf of the Palestinians under a 1994 economic accord.

Withholding that money could compromise the ability of the Palestinian government to pay salaries for 140,000 workers, including 57,000 security personnel.

Humanitarian aid will be allowed to continue.

Abdel Aziz Duaik, Hamas' new parliament speaker, denounced the move as a ploy motivated by political concerns ahead of Israel's March 28 elections.

"This is a wrong decision, and the Israelis must reconsider it," Duaik said.

"The measures that Israel declared against the Palestinian people are considered part of the ongoing Israeli collective punishment measures that aim at punishing all Palestinian people," added Palestinian legislator Ghassin Khatib.

Hamas has said it would try to make up any shortfall in part by recruiting money from the Arab and Muslim world. A senior delegation of Hamas officials arrived in Iran on Sunday to appeal for help.

Hamas, which is sworn to Israel's destruction, swept the Jan. 25 Palestinian elections. Its refusal to cave in to international pressure to disarm and recognize Israel's right to exist has prompted threats from the West to cut off hundreds of millions of dollars that it funnels to the Palestinians annually.

U.S. Secretary of State Condoleezza Rice is scheduled to be in the Middle East this coming week, where she will lobby leaders to support a boycott of Hamas.

Moderate PM

In what could be a move to put a more moderate face on Hamas, the group on Sunday nominated Ismail Haniyeh to be its prime minister. Haniyeh is seen as a leader of one of Hamas's more pragmatic wings.

"I pray to God almighty to help me in keeping up this responsibility in order to clarify the Palestinian issue," said Haniyeh on Sunday, "and the Palestinian people's sacrifices until we regain the rights which were forcibly taken from this great people."

Palestinian leader Mahmoud Abbas was expected later Sunday to formally charge Haniyeh with the task of putting together a new cabinet. Haniyeh would then have three weeks to submit a government to Abbas for approval.

Hamas, which captured 74 of 132 seats in its first run for parliament, is taking over from Abbas' long-ruling Fatah Party, which fell out of favor because of its failure to eradicate corruption and lawlessness on Palestinian streets.

With a report from CTV's Ellen Pinchuk