Israel will release to the Palestinian Authority tax funds it collects on its behalf and withheld as punishment for its move to join the International Criminal Court, the premier's office said on Friday.
"Tax revenues that have been accumulated through February will be transferred, after payments for services to the Palestinian population have been deducted, including electricity, water and hospital bills," a statement said.
Israel froze the transfer on January 2, after the Palestinians moved to join the ICC, where they would be able to sue Israeli officials.
The decision comes 10 days after Prime Minister Benjamin Netanyahu was reelected and subsequently chosen to form the next government.
The Palestinians formally become members of the ICC and can proceed with legal action there.
According to the statement, the decision to release the funds was based on "humanitarian concerns and in overall consideration of Israel's interests at this time," among other factors.
"Given the deteriorating situation in the Middle East, one must act responsibly and with due consideration alongside a determined struggle against extremist elements," it quoted Netanyahu as saying.
Every month, Israel transfers to the PA around $127 million (118 million euros) in customs duties levied on goods destined for Palestinian markets that transit through Israeli ports. Excluding foreign aid, these revenues make up around two-thirds of the authority's annual budget.
World powers had called on Israel to release the funds, while a senior Palestinian official said withholding the money is an Israeli ploy aimed at collapsing the Palestinian Authority.