Israeli ministers continued threatening to take unilateral measures if the Palestinian Authority (PA) declares statehood without a negotiated peace agreement.

According to Israeli sources, Benjamin Netanyahu's administration may even consider withdrawing from the Oslo Accords.

Israeli Minister of Environment Gilad Erian on Monday threatened to stop delivering taxes collected on behalf of the PA. He also threatened to erect more military checkpoints in the West Bank. "We will not allow the Palestinians to declare a state unilaterally."

Infrastructure Minister Ozi Landao's threats were more specific. "The first step: Israel will announce the annexation of all West Bank settlements and [Area C] zones to Israel, which Israel has a religious right to annex. This must be clear because Israel should respond promptly to any unilateral step by the Palestinians."

He added, "Any such declaration will not scare us, and they must realize that we could take similar steps."

Palestinians are determined to build state institutions in preparation for statehood, caretaker Prime Minister Salam Fayyad said in Ramallah on Sunday. "They're talking about unilateralism, to which we reply - yes, building state institutions state is our responsibility and we embrace it."

Meanwhile, Labor member and Israeli Trade Minister Ben Eliezer said his party would pull out of Netanyahu's right-wing coalition if the government followed through with its threats.

"The Labor party cannot continue to sit in this government if it decides to annex settlements," he told Army Radio, according to Reuters. "In my opinion this whole thing about annexation is just words. I think the Palestinian threat also is just words. A ping-pong of declarations will get us nowhere, the only way forward is to bring the sides together for negotiations."

Barghouthi dismisses 'ridiculous' threats

Netanyahu's threat to take unilateral action is "ridiculous," according to Mustafa Barghouthi, the secretary-general of the Palestinian National Initiative. "There aren't any Palestinian territories left to threaten - they're all occupied," he said in a statement on Monday.

Regarding the threat to halt transfers of money collected in taxes on behalf of the Palestinian Authority, Barghouthi said taking such a step would require Palestinians first cancel the Paris economic accord.

He urged the PLO Central Committee to move forward with its proposal, as well as seek international sanctions on Israel until it fulfills its obligations to remove or reroute the separation barrier as per the International Court of Justice's 2004 ruling on the wall's illegality. Once that decision is implemented, Barghouthi said, Palestinians should declare their state on the 1967 borders, which include Jerusalem.

But seeking recognition of an independent state on the 1967 borders is completely different from unilaterally declaring a Palestinian state, chief PLO negotiator Saeb Erekat said on Sunday.

"The PLO is not suggesting we unilaterally declare statehood," Erekat explained, speaking with US and EU lawmakers in Ramallah on Sunday. He affirmed that seeking UN Security Council recognition was aimed at protecting the two-state solution, which the PLO still prefers.

With regard to Israel's threats to annex areas in response, Erekat said Israeli decisions were often made unilaterally. "Settlement activities, the separation wall, and displacing Palestinians in Jerusalem and elsewhere are clear examples of Israel's unilateralism," he said.

According to caretaker Prime Minister Salam Fayyad, Palestinians are determined to build state institutions despite Israel's concerns.

"They're talking about unilateralism, to which we reply - yes, building state institutions is our responsibility and we embrace it," Fayyad said. "A Palestinian state will be established, so long as Palestinians want it, which they do, as it is their natural right to live in a homeland."

Prior to his remarks, Fayyad briefed US officials, including members of its Congress, on his plan for building a state within two years. But he said "Israeli stubbornness" was getting in the way, and urged the country to "stop settlements and abide by international law."

"The international community must emphasize Palestinian rights, at the top of which is ending the occupation, and ensure the right to determine our own future, rather than relying on the occupying power to carry out its wishes," he said.

During Israel's weekly cabinet session on Sunday, Defense Minister Ehud Barak said the current impasse would increase international support for unilaterally declaring a Palestinian state within the 1967 borders.

"I don't want to ruin your day, yet, the reality is not promising," Israeli Minister of Industry Benjamin Ben Eliezer told the cabinet, "We have to resume the peace process by force, and if Abu Mazen [President Mahmoud Abbas] doesn't want to talk to us, we must find a third party to exert pressure on him, and this third party will then have to tell him that it is the Palestinians who don't want dialogue, not us."

Minister of Social Welfare Yizhak Hetzoq said holding onto settlements was paramount. "If we wish to save parts of our homeland such as Ma'ale Adumim or Gush Etzion, we have to take difficult measures such as dividing the homeland and establishing a Palestinian state."

Netanyahu warned earlier the same day that Israel was capable of declaring unilateral steps of its own. "There is no substitute for negotiations ... and any unilateral path will only unravel the framework of agreements between us and will only bring unilateral steps from Israel's side."