The negotiations had appeared to be heading nowhere even before Wednesday's reconciliation agreement between the Palestinian groups plunged them deeper into crisis. The United States had been struggling to extend the talks beyond an original April 29 deadline for a peace accord.
"The government of Israel will not hold negotiations with a Palestinian government that is backed byHamas, a terror organization that calls for Israel's destruction," an official statement said after a six-hour meeting.
Asked to clarify whether that meant the talks were now frozen or would be called off only after a unity government was formed, a senior Israeli official said: "They are currently suspended."
Earlier in Washington, a U.S. official said the United States would have to reconsider its assistance to Abbas's aid-dependent Palestinian Authority if the Western-backed leader and Hamas formed a government, after seven years of internal bickering and unsuccessful reconciliation attempts.
The Palestinian deal envisions a unity government within five weeks and national elections six months later. Palestinian divisions widened after Hamas, which won the last general ballot in 2006, seized theGaza Strip from forces loyal to Abbas in 2007.
In an interview with MSNBC after the six-hour security cabinet meeting, Israeli Prime Minister Benjamin Netanyahu appeared to leave open a window for future talks if Abbas reversed course or reconciliation with Hamas, seen by the West as a terrorist group, fell through.
"I hope (Abbas) changes his mind," Netanyahu said. "I will be there in the future if we have a partner that is committed to peace. Right now we have a partner that has just joined another partner committed to our destruction. No-go."
But Netanyahu dismissed any notion that Hamas would not be the real power behind the bureaucrats.
The Israeli-Palestinian negotiations, championed by U.S. Secretary of State John Kerry and aimed at ending decades of conflict and creating a Palestinian state in the occupied West Bank and Gaza Strip, began in July amid strong public skepticism in Israel and the Palestinian territories.
Both sides were also at odds over Israeli settlement construction in the West Bank and East Jerusalem, activity most countries deem illegal in areas captured in the 1967 Middle East war, and over Abbas's refusal to accept Netanyahu's demand he recognize Israel as a Jewish state.
For Netanyahu, Abbas's approach to Hamas offered an opportunity to withdraw from the negotiations with a reduced risk of a rift with the United States, Israel's main ally, which also refuses to deal with the Islamist militant group.
A suspension of the talks, while casting blame on the Palestinian reconciliation venture, is also likely to calm far-right allies in Netanyahu's governing coalition who oppose the creation of a Palestinian state and territorial compromise.
For Abbas, whose official mandate as president expired five years ago, an alliance with Hamas leading to a new election potentially strengthening his political legitimacy could outweigh the prospect of any international backlash.
Palestinians have also been angered by Israel's announcement during the negotiations of thousands of new settler units and what they say was its failure to tackle substantive issues such as the borders of a future state.
"The sanctions will be measured. We will not cause the Palestinian Authority to collapse," Livni said on television.
Palestinian leaders have already made clear they would seek to further their bid for nationhood via unilateral moves to join various international bodies and United Nations agencies.
The biggest threat for Israel could come in the shape of the International Criminal Court, with the Palestinians confident they could prosecute Israel there for alleged war crimes tied to the occupation of lands seized in 1967.
"Israel will respond to unilateral Palestinian action with a series of measures," said the Israeli statement issued after the security cabinet meeting, without going into detail.
The talks had moved close to a breakdown earlier this month when Israel refused to carry out the last of four waves of prisoner releases, demanding that Palestinians first commit to negotiate after the April deadline.
Asked whether the new reconciliation moves with Hamas would incur promised U.S. sanctions, PLO Deputy Secretary Yasser Abed Rabo told Palestinian radio it was too soon to penalize a government that had yet to be formed.
"There's no need for the Americans to get ahead of themselves over this. What happened in Gaza in the last two days is just a first step which we welcome and want to reinforce," he said.
"But this step shouldn't be exaggerated, that an agreement for reconciliation has been completely reached... We need to watch the behavior of Hamas on many details during the coming days and weeks on forming a government and other things."