JERUSALEM – Israel branded the Palestinian government a “terrorist authority” Sunday and halted the transfer of hundreds of millions of dollars in tax money after Hamas took control of the Palestinian parliament.

But the Israeli government held off on adopting even more drastic measures recommended by security officials, mindful of possible international reaction.

The sanctions came as the Palestinian militant group worked to consolidate its power and form a government, nominating one of its more pragmatic leaders, Ismail Haniyeh, to be the new prime minister.

Also Sunday, Israeli troops killed four Palestinians in two separate incidents.

Mahmoud Abbas, president of the Palestinian Authority, was scheduled to meet with Haniyeh in Gaza on Monday and formally ask him to assemble a Cabinet, a task Haniyeh would have five weeks to complete. Haniyeh said Hamas would begin talks with possible coalition partners Monday.

The Islamic group, which calls for the destruction of Israel and has carried out scores of deadly suicide bombings against Israelis, trounced Abbas’ corruption-riddled Fatah Party in Jan. 25 elections, winning 74 of 132 parliament seats.

Israel and Western countries demanded the group renounce violence and recognize Israel’s right to exist, but Hamas resisted pressure to moderate. The group took control of the Palestinian legislature when the new parliament was sworn in Saturday.

“The PA is – in practice – becoming a terrorist authority,” acting Israeli Prime Minister Ehud Olmert told his Cabinet at the beginning of its meeting Sunday. “Israel will not hold contacts with a government in which Hamas takes part.”

The Cabinet decided to stop the transfer of the roughly $55 million a month it collects in taxes and tariffs on behalf of the Palestinian Authority. The order did not specify when the payments would stop, but government spokesman Asaf Shariv said the next payment, scheduled for early March, “won’t take place.”

The cash-strapped Palestinian Authority relies on that money to help pay the salaries of roughly 140,000 government employees, including about 57,000 in the security forces.

Should the government, the Palestinians’ largest employer, be forced to lay off tens of thousands of workers, it would lead to increased chaos and poverty in Palestinian towns throughout the West Bank and Gaza.

Palestinian experts estimate that the Palestinian budget shortfall is about $1 billion a year, and the Israel-collected funds would cover about half of that.

However, the Cabinet held back from adopting far harsher proposals made by Israeli security officials, including a recommendation to seal off the Gaza Strip from Israel, barring thousands of Palestinian laborers from entering Israel and eliminating all trade with the impoverished area.

Israel’s acting foreign minister, Tzipi Livni, said the government did not want to worsen the daily lives of Palestinians, a move she said would cause an international backlash against Israel.

But she warned that “Israel will take a number of additional politically significant steps regarding the Palestinian Authority.” She did not elaborate.

Defense Minister Shaul Mofaz told Israel TV the government could freeze work on the construction of a seaport and airport in Gaza.

The Cabinet also decided to ask the international community to stop giving money to the Palestinians, though it said humanitarian aid should continue. Hamas is listed as a terror organization by the United States and the European Union, and many Western countries have threatened to cut off hundreds of millions of dollars in funding for the Palestinian Authority if the group does not moderate.

Abbas said cuts in aid are already being felt. “We are in real financial crisis,” he said.