The European Commission has temporarily halted direct aid payments to the Palestinian government, which is now led by militant group Hamas.
Hamas, and its PM Ismail Haniya, took office last month
European Union foreign ministers are due to meet next week to discuss what to do about future aid.
The EU is the largest donor to the Palestinian Authority, which is reliant on foreign aid.
The EU has been threatening to cut off direct payments unless Hamas renounces violence and recognises Israel.
A spokesman for the Hamas government said the decision to suspend aid was a form of "blackmail" that would harm the Palestinian people.
A European Commission spokeswoman, Emma Udwin, told reporters in Brussels that Hamas had not yet met the international community's conditions, which include a call for Hamas to accept past peace agreements with Israel.
She said the Commission was adopting "a policy of maximum prudence" so as not to pre-judge the European ministers' discussions in Luxembourg on Monday.
However, the BBC's diplomatic correspondent Jonathan Marcus says the Commission's decision represents a clear warning to Hamas of the consequences of its failure to abide by international demands.
Hamas, which took office last week under Prime Minister Ismail Haniya, has already said it would turn to the Islamic world to make up any shortfall in funding from the West.
The Palestinian Authority (PA) has received about $600m (500m euros; £340m) a year in aid from the EU since its foundation in 1994, with another $400m coming from the US.
Ms Udwin said some $36.9m (30m euros; £21m) in aid from the European Commission was at stake in the immediate future.
The freeze covers all direct aid to the government and payment of public employees' salaries with EU funds through the World Bank.
It does not affect humanitarian aid sent to non-governmental organisations or to United Nations relief agencies.
Money from individual member states is not affected either.
The PA is facing a financial crisis. Mr Haniya said earlier this week that his government had inherited a finance ministry that had no money left, yet had mounting debts.
The European Commission released $143m (118m euros; £83m) in direct and indirect aid in February, before Hamas took office.
It has also redirected some aid to pay Palestinian electricity bills directly to suppliers, including the Israeli electricity company, without going through the government.
1: Distributed through World Bank $85m
2: For Isr/Pal integration $12m
3: For UN relief (UNRWA) $77m
4: Food aid $35m
5: Humanitarian aid $33m
6: Special projects $24m
7: Infrastructure $72m
8: Other donations by member states $262m
EU TOTAL: $600m
1: Unused funds from 2003/04 financial year $175m
2: To pay PA debts $20m
3: Spending on new Gaza infrastructure $50m
4: USAID projects $155m
US TOTAL: $400m