JERUSALEM, March 25 (Jeffrey Heller/Reuters) - Israel said on Monday it would restart regular monthly tax transfers to the Palestinian Authority, restoring vital funding days after U.S. President Barack Obama called for confidence-building steps towards peace.

The decision followed the announcement by the United States on Friday that it would deliver $500 million in annual aid to the Palestinians, almost half of which had been withheld by the U.S. Congress in response to the Palestinians' bid for statehood at the United Nations.

The American and Israeli pledges come on the heels of Obama's three-day visit to the region last week when he called for a resumption of peace talks that have been stalled since 2010 and the creation of a viable Palestinian state.

Israel began withholding the transfers - about $100 million in tax revenues it collects each month on behalf of the Authority - in November after President Mahmoud Abbas succeeded in gaining de facto U.N. recognition of Palestinian statehood.

The cut-off was a blow to Abbas who urgently needed the cash to pay public sector salaries at a time of growing financial strain. Officials had warned of possible unrest in the Israeli-occupied West Bank if wage arrears were not covered.

Under international pressure, Israel made a transfer in January and again in February, but said at the time decisions on whether to continue would be made on a month-by-month basis.

Israeli Prime Minister Benjamin Netanyahu's office on Monday said he had instructed Finance Minister Yair Lapid to resume the transfers. A spokesman for Netanyahu said that meant regular monthly payments would be made from now on.

Palestinian Prime Minister Salam Fayyad told Reuters: This was Palestinian money that was being withheld from us, and now these funds can be directed toward alleviating our grave financial crisis.

On his visit, Obama said he wanted to see steps that both Palestinians and Israelis can take to build trust and confidence upon which lasting peace will depend.

Palestinians seek a state in the Gaza Strip and the West Bank with Arab East Jerusalem as its capital - territories Israel captured in the 1967 Arab-Israeli War.

Talks have stalled over the issue of Israel's continued building of settlements for its citizens in the occupied West Bank.

Abbas's Palestinian Authority exercises limited self rule in the West Bank under interim peace deals. (Additional reporting by Ali Sawafta and Noah Browning; Editing by Pravin Char)