Israel today pulled the plug on its monthly tax payment to the Palestinian Authority, cutting off a cash lifeline which will leave the interim government unable to pay thousands of police and civil servants.

The decision to revoke the payment of around $50 million in customs revenues it collects at border crossings, announced after a week of deliberation by Israeli politicians, is likely to fuel further unrest on the streets of Gaza and the West Bank.

The Palestinian police force consists mainly of officers loyal to the Fatah party, which was pushed from power in a landslide vote for militant organisation Hamas last week. Officers have already staged a series of protests, at one stage occupying the Palestinian Administration's offices in Ramallah in protest at the Hamas victory.

The customs revenues are the main source of income with which the Authority pays its 135,000 civil servants and security forces. Israel, and much of the West, has said that it will not give money to any Hamas-led government unless it agrees to renounce violence and recognise Israel's right to exist.

Without such payments the Palestinian Authority, which ran a $1 billion (£570 million) operating deficit last year, would almost certainly collapse. The EU, the most generous donor to the Palestinians with funding of £600 million a year, has decided to continue its financing until a government is formed.

Violence escalated on the streets today with Hamas militants blowing the front door off the home of a former security chief in Khan Younis, in an apparent assassination attempt. It was the first attack on a leading Fatah figure since the elections as tensions between the two movements mount.

Hamas said that three of its members were targeted in a drive-by shooting two days ago, with two wounded.

Mahmoud Abbas, who remains as Palestinian President despite the electoral blow dealt to his party last week, said today that he would only accept a government containing Hamas if it renounced violence and recognised Israel.

Omar Suleiman, the Egyptian intelligence chief and a veteran mediator among Palestinians, briefed journalists following a meeting between Mr Abbas and President Hosni Mubarak of Egypt. He said: "Hamas should be committed to three things. One, to stop the violence. Two, it should become a doctrine for them to be committed to all the agreements signed with Israel. Three, they have to recognise Israel.

"It is hard to convince them to change 180 degrees. I hope it will happen... You know they are very radical and it is hard to convince them. If they don’t do it, Abu Mazen (Abbas) will not ask them to form the government. Abu Mazen will form the government with other parties."

The scale of Hamas landslide - it won 74 of the 132 seats - would, however, make such a minority coalition technically impossible to assemble.

Mr Abbas's comments follow those made by President Bush in his State of the Union address last night in which he ordered Hamas to "recognise Israel, disarm, reject terrorism, and work for lasting peace".

Asked about the Palestinian situation during Prime Minister's Questions in the Commons today, Tony Blair said: "The most important thing is to say to Hamas that we respect the mandate ... but the only basis on which there will be progress in the Middle East is with a two-state solution, a secure Israel and viable Palestinian state.

"[Otherwise] we will not be able to take that process forward. Hamas faces a very fundamental choice - if they make that choice for democracy, peace and working side-by-side with Israel we can take that peaceful process forward."

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