By Jihan Abdalla
RAMALLAH, West Bank (Reuters) - Israel will not carry out its threat of financial sanctions if Palestinians achieve a statehood upgrade at the United Nations, a Palestinian diplomat predicted on Monday.
Mohammad Shtayyeh, a senior member of President Mahmoud Abbas' Fatah party, said Israel had no interest in bringing about the collapse of the Western-backed Palestinian Authority (PA), which administers parts of the occupied West Bank.
"In my opinion, most of the declared measures will be empty threats, rather than serious ones, because Israel has a vested interest in maintaining the status of the Palestinian Authority," Shtayyeh told journalists in Ramallah.
Peace talks with Israel have lain dormant since 2010. Pursuing a diplomatically risky alternative, Abbas will ask for an upgrade at the U.N. General Assembly to make Palestine an "observer state", rather than just an "entity" as at present.
The switch from entity to state means Palestinians could not only participate in assembly debates, but also join other world bodies, such as the International Criminal Court (ICC), which it could use to try to penalize the Israeli occupation.
He is virtually assured of a majority vote in favor. But the United States and Israel have warned well in advance that they will not accept the outcome, since only a peace treaty with Israel can truly establish an independent Palestinian state.
Israeli Finance Minister Yuval Steinitz has said Israel would retaliate by withholding about $100 million monthly in taxes and customs duties which it collects on the Palestinians' behalf, a major source of their income.
The United States has reduced aid to the PA, which is struggling to pay the salaries of its 153,000 employees and security apparatus.
When Palestinian leaders in the West Bank faced violent protests from their people following austerity measures in September, Israel provided a hasty advanced payment of the customs money, which helped the PA roll back the measures and calm the streets.
Abbas has kept the West Bank quiet, in stark contrast to the Gaza Strip where the ruling Islamist Hamas movement is frequently engaged in clashes with Israel.
Arab nations have pledged a financial safety net for the Palestinians for the full amount withheld by Israel, but wealthy Gulf countries have often fallen short on their aid pledges.
Shtayyeh and other senior officials predict Israel may hit back at their U.N. initiative by building and legalizing more Israeli settlements in the West Bank and East Jerusalem - an expansion most countries would condemn.
(This story has been corrected to make clear the ICC is not an U.N. agency)
(Writing by Jihan Abdalla; Editing by Crispian Balmer and Janet Lawrence)