Palestinian banks could be cut off from the Israeli banking system starting next week following a decision by Israel's finance minister to cease dealings between the two financial institutions, according to a report on Thursday by Israeli newspaper Haaretz.

Israeli Prime Minister Benjamin Netanyahu has two days to convene a cabinet meeting to discuss reversing plans by Finance Minister Bezalel Smotrich to isolate Palestinian banks from both the Israeli and international banking systems.

The Palestinian economy is based on the Israeli currency, the shekel, making it reliant on ties to Israel and its financial dealings with the rest of the world must go through the Bank of Israel and Israeli banks.

Earlier this month, the far-right minister Smotrich threatened to paralyse the Palestinian Authority's economy in response to the United States imposing sanctions on four West Bank extremist settlers accused of violence against Palestinians. 

Israeli banks have heeded the sanctions despite calls by Smotrich not to comply.

Two Israeli banks, Israel Discount Bank and Bank Hapoalim, currently maintain the connections of Palestinian banks with the banking system in Israel and globally. 

To protect them from lawsuits involving the Palestinian Authority for "transfering funds to terror groups", the Israeli government has been issuing a waiver of protection for the two banks on an annual basis, signed by the finance minister.

Smotrich is now refusing to renew the arrangement, which has been in place for years. 

Without this protection, the PA will be stripped of immunity and the Israeli banks will be exposed to lawsuits and are expected to cut ties with Palestinian banks.

The consequences of isolating the PA from the financial world and Israel's economy would significantly paralyse the Palestinian economy.