Israel's cabinet unanimously rejected Sunday the United Nations vote upgrading the Palestinians' status to that of a "non-member state" of the United Nations, saying the move would not form a basis for negotiations between the sides, dpa reported.
The Israeli decision came as President Mahmoud Abbas received a hero's welcome as he returned to Ramallah from New York, where he had overseen the Palestinian upgrade appeal at the world body.
"We have a state now," Abbas told thousands of Palestinians who flocked to the presidential compound to receive him.
"Raise your heads high, because you are Palestinians," he said. "A young Palestinian will one day raise the Palestinian flag over Jerusalem, the eternal capital of the state of Palestine," he promised.
Thousands had gathered ahead of time outside the presidential compound carrying signs and Palestinian flags.
The flags of the 138 countries which supported the upgrade resolution were also prominently displayed. Foreign diplomats stationed in Ramallah also attended the homecoming.
Thursday's vote in favour of upgrading the Palestinian's status - which in effect tacitly endorsed Palestinian statehood, without actually proclaiming a state on the ground - passed by 138 to 9, with 41 abstentions.
The measure was bitterly opposed by Israel, which accused the Palestinians of bypassing agreements which said a Palestinian state could only arise via negotiations.
In rejecting the UN vote, the Israeli cabinet decision noted there was nothing in the UN resolution to change the status of what the cabinet called "the disputed areas" (the West Bank) and did not "lessen the right of Israel and the Jewish people" to those areas.
Prime Minister Benjamin Netanyahu told the ministers that the Palestinian appeal to the UN was a "blatant violation of agreements signed with the government of Israel."
"There will be no Palestinian state until Israel is recognized as the state of the Jewish people and there will be no Palestinian state until the Palestinians declare an end to the conflict," Netanyahu said.
In another response to Thursday's UN vote, Israel will withhold transfers of tax revenue it collects on behalf of the Palestinian Authority, Finance Minister Yuval Steinitz said Sunday.
The confiscated funds - around 460 million shekels (120 million dollars) - will be used to offset a 800-million-shekel debt the PA owes the Jewish state for electricity.
According to Israel Radio, the PA owes over 1 billion shekels to Israel.
Earlier Israel reacted to the Palestinian triumph at the UN Thursday by announcing the construction of 3,000 homes in West Bank settlements and East Jerusalem, sparking international condemnation.
"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," a defiant Netanyahu told his cabinet.
The construction decision includes building in the corridor known as "E-1" which divides East Jerusalem from the Ma'aleh Adumim settlement.
Although construction will link the settlement with the city, it will also effectively bisect the West Bank into two, threatening the territorial contiguity of any future Palestinian state.
The decision was heavily criticized by the United States, Britain and France, as well as by the European Union. UN Secretary General Ban Ki-moon also criticized it, saying the plan "would represent an almost fatal blow to remaining chances of securing a two-state solution."