RAMALLAH, West Bank, Nov 2 (Tom Perry/Reuters) - Israel's tough responses to a successful Palestinian bid to join UNESCO -- financial sanctions and a faster settlement drive in the occupied West Bank -- are unlikely to halt a Palestinian quest for recognition as a state at the United Nations.

A senior Palestinian official said on Wednesday that Israel was trying to undermine the Palestinian Authority (PA) through a decision on Tuesday to freeze temporarily transfers of PA funds after it won membership of the U.N. cultural agency.

The UNESCO vote marked a success for the Palestinians in their broader thrust for recognition as a sovereign state in the U.N. system -- an initiative opposed by Israel and its main ally the United States.

In what the Palestinians saw as a reprisal, Israeli Prime Minister Benjamin Netanyahu's cabinet also decided to accelerate the building of Jewish settlements on land where the PA aims to establish an independent state next to Israel.

It is very serious. Israel wants to strive to destroy the role of the Palestinian National Authority, Yasser Abed Rabbo, secretary-general of the Palestine Liberation Organization (PLO), told Voice of Palestine radio.

Saeb Erekat, another senior Palestinian official, said in a statement that Israel's latest decisions would not change our course of action, signaling the Palestinians will push ahead regardless in their U.N. initiative.

Israel's decision to step up settlement-building drew expressions of disappointment and concern from Washington and the European Union.

We are deeply disappointed by yesterday's announcement about accelerated housing construction, White House spokesman Jay Carney said, adding that such unilateral actions did not help bridge differences with the Palestinians.

The European Union's foreign policy chief Catherine Ashton said she was deeply concerned by the latest Israeli decisions and urged Israel to reverse them.

U.N. Secretary-General Ban Ki-moon also said he was deeply concerned by Israel's announcement and said funds transfers to the Palestinians must continue in line with Israel's obligations.

Netanyahu, in a speech on Wednesday, said construction in Jerusalem -- whose eastern sector Palestinians want for the capital of a future state -- is Israel's right and obligation. Israel deems all of Jerusalem, including areas taken in a 1967 war, as its capital, a status not recognized internationally.

The revenues Israel has decided to withhold include duties on goods being imported to the Palestinian territories and which amount to around half of the PA's domestic revenue base.

In May, Israel temporarily withheld the revenues in response to a reconciliation pact between Abbas and the Hamas movement, which governs the Gaza Strip and is deeply hostile to Israel.

That suspension meant the PA was unable to pay salaries to its 150,000 employees on time for the first time since 2007. A PA spokesman said salaries for November were paid on Wednesday despite the Israeli decision.

The (Israeli) decision to deny Palestinians access to their own custom tax revenues is an unlawful punitive measure that Israel has done in the past (2005, 2006, 2007, 2011) and will most likely do again, the PA said in a statement.

While Israel may want to punish the Palestinian Authority for its pursuit of statehood at the United Nations, analysts question whether Israel has any interest in the PA's collapse, not least because of its role in policing the West Bank.

PA security forces currently cooperate with the Israelis.

This is one point of strength the PA has, said George Giacaman, a political scientist at Birzeit University in the West Bank.


MORIBUND PEACE PROCESS

The Authority was set up in 1994 as a state-in-waiting at the outset of a peace process which the Palestinians hoped would yield their independence in the West Bank, East Jerusalem and the Gaza Strip, which were all captured by Israel in 1967.

That process, to the extent it exists at all, is in deep crisis. The last round of direct peace talks broke down around a year ago because of a dispute over Israel's expansion of settlements in the West Bank and East Jerusalem -- construction which Abed Rabbo said aimed to kill any chance of Palestinian independence.

Israel said on Tuesday the areas where building would be accelerated would remain in its hands in any future peace deal.

The Palestinians have no one but themselves to blame for the current impasse in the peace talks that stems directly from their refusal to negotiate peace, from their boycotting the negotiations and from their decision to attack Israel in international fora, Netanyahu spokesman Mark Regev said.

UNESCO was the first U.N. agency to admit the Palestinians as a full member since President Mahmoud Abbas applied for a full seat at the United Nations on Sept. 23.

Israel and the United States both see the Palestinian policy as an attempt to bypass bilateral peace talks. Israel also says that the Palestinians are aiming to delegitimize it.

Palestinian analysts say Abbas' resolve to press ahead has only been hardened by the recent success of his rivals in the Islamist Hamas movement, which last month scored points among Palestinians by brokering a prisoner swap with Israel.

The U.N. Security Council is expected to decide the fate of the Palestinian application for full membership around Nov. 11. Washington has vowed to use its veto if it comes to a vote.

The Palestinians could then ask the General Assembly to upgrade their status to that of a non-member state, an improvement on their current standing as an observer entity.

They also have plans to apply for full membership of other U.N. agencies, regardless of the course of events in New York. (Additional reporting by Ori Lewis in Jerusalem, Arshad Mohammed in Washington and Louis Charnonneau at United Nations; Editing by Mark Heinrich and Roger Atwood)