JERUSALEM, Feb. 20 (JTA) — Israel is laying down the battle lines with a future Palestinian Authority led by Hamas. With the radical Islamic faction gathering political power and refusing calls to reform from both the West and more moderate Palestinians, Israel has acted pre-emptively. Interim Prime Minister Ehud Olmert’s Cabinet on Sunday ordered a permanent halt to the monthly transfers of some $50 million in tax revenues collected on behalf of the Palestinian Authority and ordered tighter restrictions on travel across the West Bank and Gaza Strip boundaries. The Palestinian Authority is, for all intents and purposes, becoming a terrorist authority. The State of Israel will not agree to this,” Olmert told fellow ministers. A day before, the new Palestinian Legislative Council, the Palestinian Parliament, was sworn in with Hamas taking 74 of its 132 seats. That paved the way for Hamas to form the next Cabinet. Under Palestinian Authority law, President Mahmoud Abbas remains chief executive with a fair amount of autonomy in diplomatic matters. He urged Hamas to respect past Israeli-Palestinian peace accords. This was quickly rejected by Ismail Haniyeh, Hamas’ choice for Palestinian Authority prime minister. “We were elected on a different political agenda,” he said, referring to the Jan. 25 vote in which Hamas crushed Abbas’ Fatah. That agenda includes preserving the Hamas charter calling for the Jewish state’s destruction, not renouncing terrorism — and at most entering into an extended state of non-belligerency with Israel. Israel’s Shin Bet chief warned against any such truce, which many see Hamas using to rearm and regroup for a future war. “If a Hamas state is established that could mobilize along Israel’s borders with a military capability — as far as I’m concerned, that’s a strategic threat,” Yuval Diskin told the Knesset Foreign Affairs and Defense Committee in a briefing Monday. “We cannot accept a truce if the price is that the Palestinians will establish a Hamas state and every Islamic organization from Saudi Arabia to Iran, global jihad to Al-Qaida, will come,” he said. Although no one expects Olmert to yield on Israel’s hard-line stance toward Hamas, especially with general elections looming on March 28, Sunday’s sanctions were not as tough than many expected. The Defense Ministry had recommended a blanket ban on Palestinians entering Israel or crossing its territory to get from the West Bank to Gaza Strip. A Jerusalem source said the government is trying to tread a middle path of putting Hamas under pressure while not sending more mainstream Palestinians into the arms of potential patrons such as Iran and other extremist Arab regimes. Israel also finds itself caught in the middle of a growing schism between the United States and European Union on how to handle a Hamas-led Palestinian Authority. The former is calling for international isolation while the latter prefers to engage the radical Islamic group in hope of taming it. “With all the variables at play now, both in Israel and abroad, Olmert is trying to take a tough stance while leaving room to maneuver,” the Jerusalem source said. But there is no let-up in Israel’s security measures. Israeli forces killed four Palestinian terrorists since the weekend in separate operations in the West Bank and Gaza. Also slain were two Palestinian rock-throwers who attacked soldiers conducting a sweep of Nablus.