Israel has warned the Palestinians not to declare unilateral statehood.
Palestinian Prime Minister Salam Fayyad announced plans to declare a Palestinian state as early as next year.
Fayyad has begun ambitious reforms of government and security forces, building up Palestinian institutions and developing the economy to prepare for independence.
The West welcomed the reforms, but Israel is concerned that a unilateral Palestinian statehood declaration could win international recognition.
The Palestinian policy has emerged since U.S. attempts to restart peace talks have stalled. But Israeli Foreign Minister Avigdor Lieberman says such attempts by the Palestinians will prompt action, including annexing parts of the West Bank and annulling past peace agreements.
"Any unilateral decision will release us from all of our commitments and will allow us also to make unilateral decisions," Lieberman was quoted as saying by the Ynet news Web site. "For example, imposing Israeli sovereignty on certain areas, cutting off all kinds of ties and transfers of money and a string of benefits and agreements put into place since the Oslo accords."