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.

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

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.”Israel also is trying to convince other countries to cut off funding to the Palestinian Authority. The United States has demanded that the Palestinian government return $50 million in aid it gave last year, and it’s unlikely to hand over any more money unless Hamas agrees to the changes sought by Israel and much of the rest of the world.

Following Israel’s actions, a top Hamas leader, Khaled Mashaal, headed from Syria to Iran to seek financial support from a government whose president has called for Israel to be wiped off the map.

“Under the Israeli threats, the Palestinian government and the Palestinian people have the right to look for finances for this government from whomever – and no one has the right to oppose that,” said Said Sayyam, one of the new Hamas lawmakers from Gaza.