Reporting from Jerusalem— As Israel considers its reaction to the Palestinian drive for recognition of statehood at the U.N., officials are weighing calls for swift retaliation against fear that tough measures could be counterproductive.

Prime Minister Benjamin Netanyahu says he is evaluating Israel's next step. But key members of his right-wing coalition are pushing for a firm response, which they say would discourage Palestinians from pursuing their strategy of gaining United Nations recognition or taking other unilateral steps away from the negotiating table.

Foreign Minister Avigdor Lieberman has warned Palestinians of grave consequences and, according to one Israeli newspaper report, threatened to quit the government unless punitive actions are taken. He later denied saying that he would quit over the issue.

Lieberman and others say the Palestinian application for U.N. membership violates the 1993 Oslo peace accords, which committed both sides to work out their differences at the negotiating table. As a result, they say Israel should annex all or part of the West Bank, terminate the Oslo accords or cut off tax transfers that Israeli ports collect on behalf of the Palestinian Authority. That revenue, about $100 million a month, accounts for much of the authority's budget.

But concern is growing that such a harsh response could backfire for Israel by fueling extremism and increasing instability in the West Bank.

"While the government might make a lot of noise and talk loudly in response to the Palestinian step, there's little it can really do in terms of concrete, effective steps," said Mideast expert Mark Heller of Tel Aviv's Institute for National Security Studies.

Critics say tough measures by Israel might cause the Palestinian Authority to collapse, leaving a security vacuum in the West Bank. The authority employs about 80,000 security personnel, who cooperate closely with the Israel Defense Forces and function as a first line of defense in large West Bank cities.

Diplomats from the United States and other countries are urging Israel to refrain from freezing the tax transfers.

"We understand that they want to tell the Palestinians that there's a cost for doing these kinds of things, so they may want to starve them of cash," said one diplomat, who spoke on condition of anonymity. "But it's a bad idea. The danger is that the guys who are keeping the security would stop doing that. For Israel, it's counterproductive."

Israeli army commanders have echoed such sentiments, officials said.

Israelis aren't the only ones vowing to punish the Palestinian Authority. American lawmakers have proposed legislation to cut off about $500 million in annual U.S. assistance to Palestinians in response to the U.N. initiative.

The Obama administration opposed Palestinians' U.N. membership bid, formalized Friday by Palestinian Authority President Mahmoud Abbas. The bid for full U.N. membership is likely to remain for several weeks in the Security Council, where the U.S. has said it will veto it if it comes to a vote. However, the administration is concerned that cutting off funds is against U.S. interests.

Analysts say a collapse of the Palestinian Authority would result in the disbanding of U.S.-trained security forces, opening a window for Islamic militants, particularly Hamas, the key rival to Abbas. Despite a recent reconciliation agreement, Abbas' Fatah movement and Hamas, which controls the Gaza Strip, remain deeply divided.

Many predict that Hamas would use any weakness in the Palestinian Authority to try to seize control of the West Bank.

"Hamas would gain from any kind of collapse," said David Makovsky, director of the Washington Institute for Near East Policy's Project on the Middle East Peace Process.

Palestinian officials say they are concerned about the potential loss of funds, and would try to replace them with donations from the Arab world or elsewhere. Otherwise, they say they are prepared to dissolve the Palestinian Authority and turn over responsibility for the West Bank's 2.5 million people to Israel.

"Israel has nothing left to scare us with," said Palestinian official Nabil Shaath. "It can stop the funds, but that would mean we will not be able to pay the security forces. So Israel has to come in and assume security."

Israeli officials say that they think the Palestinians are bluffing, but that Israel would be able to fill the security void, if necessary.

However, former Israeli military chief of staff Dan Halutz expressed doubt.

"It's not a threat to the Palestinians because I don't think there's anyone in Israel who wants to go back and take control of the foundations of Palestinian society," he said.

On the streets of the West Bank, Palestinians are bracing for a crackdown. A recent poll found that 90% expect Israel to retaliate. Nevertheless, 84% said they supported the U.N. initiative, according to a September survey by Near East Consulting.

Israeli officials say their response will depend on Palestinians' moves in coming weeks, particularly whether they turn to the U.N. General Assembly, which is considered more favorable to their cause than the Security Council.

Israelis say they are studying less severe forms of retaliation, such as reinstalling checkpoints, increasing settlement construction or restricting trade and commerce into the territories.

"We are being very deliberate and cautious," said government spokesman Mark Regev. "We are seeing what Palestinians are doing and will respond in return."