The Palestinian Authority (PA) has frozen 39 accounts belonging to Islamic charities suspected of having links with militant groups.
Recipients demonstrated in support of the charities
Israel and the United States had urged the PA to take action against militant organisations - including Hamas and Islamic Jihad - which have called off a ceasefire.
Last week Washington froze the assets of six Hamas members, as well those of charities the Americans say are controlled by the group.
Militants have denounced the bank account freezes, saying those who depend of charity money and services will suffer as a result.
However, Palestinian information minister Nabil Amr denied that the needy would be affected.
"We have put in place a mechanism which will guarantee that nothing happens to the detriment of the poor," he told AFP news agency on Thursday.
The move was condemned by Hamas political leader Abdel-Aziz al-Rantissi.
"This step from the Palestinian Authority comes after pressure from the Americans and the Zionists," he told AFP.
Mohammed Al-Hindi, a senior leader of Islamic Jihad, also criticised the step.
"It will be very bad for poor Palestinians and we are asking the Palestinian Authority and President (Yasser) Arafat to reverse this step," he said.
The PA came under renewed intense pressure to crack down on militants in the wake of a suicide attack that killed 21 people in Jerusalem last week.
Hamas and Islamic Jihad both called off a seven-week-old truce after Israel killed Hamas co-founder Ismail Abu Shanab in retaliation for the bombing.
About 2,000 Palestinians on Thursday demonstrated in Gaza City against the freezing of charity bank accounts.
The protestors carried banners with slogans like: "We are not terrorists," "We want to eat" and "Who will take care of our orphans?"
The Jerusalem bombing led to the end of the truce
"No-one will help me except the institution, without it, I have no means of raising my eight children," a woman demonstrator said.
AP news agency provided a list of nine charities that it says have been targeted.
They include al-Jamiya al-Islamiya, the Islamic Young Women's Association, As-Salah Association, the Social Care Committee, the Palestinian Student Friends Association, the Islamic Charity for Zakat, al Mujamma al-Islami, Al Nour Charity Association and al-Aqsa Charity Association.
The banks were told no money can be withdrawn from the charities' accounts without authorisation of the Palestinian attorney general.
Hamas denies any official connection with the charities, but correspondents say some of their directors are believed to belong to militant groups.