Palestinian leader Mahmoud Abbas has refused to accept hundreds of millions of dollars of taxes collected by Israel because money that Israel says it is owed for utilities has been deducted.
Israel had previously refused to release the money in response to the Palestinian decision to sign up to the International Criminal Court.
Mr Abbas has threatened to mount fresh legal action against Israel at the court demanding full payment.
Israel started withholding around $130 million a month in tax and customs revenue in December.
The move came after the Palestinians announced that they were joining the ICC, a move finalised on 1 April.
Under international pressure, Israel agreed last week to resume the transfers, saying it would immediately pay around $400m, the withheld revenue minus the amount owed by the Palestinians for utilities supplied by Israel.
President Abbas said those deductions amounted to a third of the total sum that Israel owed the Palestinians.
"We are returning the money. Either they give it to us in full or we go to arbitration or to the court (ICC). We will not accept anything else," he said in a speech.
An official at Prime Minister Benjamin Netanyahu's office said Israel had deducted a portion of the Palestinians' electricity, water and health bills from tax revenue it transferred and was "willing to transfer back to the Palestinian Authority the sum that was returned whenever it wishes".
In February, Israel's state-owned electric company briefly cut power to several Palestinian cities in the occupied West Bank to press for payment of what it said was $492m owed by the Palestinian government.
Palestinians in the West Bank, territory Israel captured in the 1967 Middle East War, are largely dependent on electricity supplied by Israel Electric Corp.