JERUSALEM, Dec. 11 (JTA) — Israel has taken a major step to halt the flow of funds from Israeli Arabs to Palestinian terrorists. In a move that Israeli hopes will harm the finances of Hamas, Israel´s High Court of Justice recently turned down an appeal filed by an Arab-owned investment company, Al-Manar, seeking the return of $1 million Israel had confiscated. In its ruling last week, the high court said the funds had been lawfully confiscated because Al-Manar transferred funds to Beit el-Mal, an investment company operating in Palestinian-controlled areas that allegedly is Hamas´ financial arm. Coming just days after President Bush froze the assets of three groups he said financed Hamas terror, Israeli officials called the court ruling a significant step in the financial battle against Palestinian terrorism. "It is the first time that the state has confiscated such a large sum," said Shalom Harari, former Arab affairs adviser at the Defense Ministry. "In the past, the defense establishment confiscated much smaller sums — here a thousand, there a thousand," Harari said. "The confiscation of" $1 million will force Hamas and other terrorist groups to "re-evaluate their financial strategy." Al-Manar´s directors say the confiscation struck a death blow to their organization, whose capital, they maintained, does not exceed $4 million. Sources close to the organization charged that the confiscation was another government attempt to deprive Israel´s Arab population of opportunities for economic independence. According to Al Manar´s director general, Mohammad Mustafa, the confiscation caused severe financial damage to people who had invested all their savings in Israeli Arab economic projects. Al-Manar invested in projects such as the construction of a shopping mall in the Israeli Arab city of Umm el-Fahm, the development of an Internet company and the construction of a solar energy project, Mustafa said. The court´s ruling followed the American freeze on the assets of three groups — Beit el-Mal among them — that allegedly fund Hamas terrorism. Another was the Texas-based Holy Land Foundation for Relief and Development, and the third, based in Palestinian-ruled areas, was the Al Aqsa International Bank. "Those who do business with terror will do no business with the United States — or anywhere else the United States can reach," Bush said Dec. 4. After Bush made the announcement, officials in Canada and Italy also froze the groups´ assets. Such measures may represent an important chapter in the battle against international terrorism, but Israeli experts believe there still is a long and difficult road ahead in efforts to "dry out" Islamic terror groups financially. With funds filtered from a variety of sources into dozens of financial institutions in the West Bank, Gaza and eastern Jerusalem, these experts say it is almost impossible to cut the flow of money. Most of the money, they say, comes from sources in the Persian Gulf, particularly Saudi Arabia. Israeli intelligence officials recently passed on to their U.S. counterparts detailed information about how terrorists in the Middle East and around the world get their funding. Israeli officials also met recently with financial officers of Citibank — one of the banks the Holy Land Foundation allegedly used to transfer funds to the West Bank and Gaza — to discuss ways of stopping such transfers. Israel´s decision to confiscate the $1 million from Al-Manar came after officials said they traced illegal transfers to Beit el-Mal. On the face of it, there is nothing unusual about Beit el-Mal, which invests in hotels, banks and a number of industrial projects in the West Bank and Gaza. Four years ago, however, Israeli officials declared Beit el-Mal an illegal group, charging that it is part of Hamas´ infrastructure. By contrast, Al-Manar is a legal Israeli-Arab investment company. It is headquartered in the Israeli Arab city of Umm el-Fahm, a hotbed of Islamic fundamentalism. For many years, the driving force behind Al-Manar has been Suleiman Aghbariya, who is presently Umm el-Fahm´s mayor. Aghbariya also is one of the leaders of the Islamic Movement in Israel, a political group that fights for the rights of Israeli Arabs whose ties to fundamentalists in Palestinian-controlled areas have frequently been questioned. Israeli officials arrested Aghbariya several times on suspicion of involvement in unlawful activities, but released him for lack of proof. Al-Manar´s Mustafa denied any connection with the Islamic Movement, except for the fact that Aghbariya served on Al-Manar´s board of directors. Mustafa told JTA that Al-Manar deposited $1 million three years ago with Beit el-Mal, which he described as a financial investment. "Not only did we not know that Beit el-Mal had any connections with Hamas, but as soon as the organization was outlawed, we pulled our money," he said. Al-Manar officials have stated in the past that funds transferred from Israel to Islamic organizations in the territories are aimed at helping needy Palestinian families. Al-Manar also has engaged in campaigns to collect money for the widows and orphans of Palestinians killed in clashes with Israeli troops. Israeli officials long suspected that this provided an indirect way of funding Hamas, but they found it hard to prove. Even so, Israeli security officials say that even funds transferred from Israel for humanitarian causes in the territories are problematic because they free up other resources for terrorist activities. Until the outbreak of the intifada in September 2000, Israeli experts estimate, Islamic groups in Israel and the Palestinian territories drew in some $40 million annually from contributions and investments. This year, they say, that sum has at least doubled — perhaps even reaching $100 million — because of increased contributions from people sympathetic to the Palestinian cause. The confiscation of $1 million may not sound like much in this context, the experts say, but it is as a warning shot to Palestinian terrorists that the free flow of currency from Israel may be over.