The country stopped giving money to Palestine on 1 November, following the Palestinians membership at the UN agency Unesco.
However, Israel said that the move could be subject to change, depending on whether Palestinians decide to not take one-sided decisions.
The US has supported Israel and has said they will go as far as blocking a membership request from Palestine, which is submitted to UN Security Council.
The office of Israeli Prime Minsiter Benjamin Netanyahu said that his country will unfreeze the funds if the Palestinian Authority (PA) abandons any “unilateral steps”
However, Defence Minister Ehud Barak told the BBC, “Our stance is that monies should be transferred, they belong to the Palestinians, are collected by us. I am happy the issue is being rethought.”
Israel has transferred about $100m (£64m) in tax and tariff monies, which are collected each month to the PA.
But if this money is not released, Palestinian public sector jobs could be threatened.
Palestinian Prime Minister Salam Fayyad told reporters that if the money was not released, about 150,000 workers might not get their salaries.