The Palestinian Authority is fast approaching the point of being completely incapacitated by Israel's refusal to hand over tax revenues belonging to the authority, Palestinian Prime Minister Salam Fayyad said.

Israel's freeze on the taxes and fees it collects for the Palestinian Authority at borders has deprived the government of two-thirds of its normal revenue since November 1, making it hard to pay salaries and fix infrastructure, Fayyad said.

This is our money, he said at a news conference alongside Norwegian Foreign Minister Jonas Gahr Stoere. It has nothing to do with donor assistance or anything like that.

Stoere demanded an end to the policy that Israel imposed a day after the U.N. cultural agency UNESCO granted full membership to the Palestinians.

It amounts to waterboarding an economy, Stoere said, because you almost kill it while allowing a small amount of air to come in.

Israel has called the withholding of funds temporary and complained the Palestinians were unwilling to open direct peace talks, while Palestinian leaders have said they would talk only if Israel halts settlement activity in areas it occupies.

Fayyad said the frozen funds amount to some $100 million (64.5 million pounds) per month, or two-thirds of the Palestinian Authority's revenue stream excluding international aid.

He spoke shortly after Palestinian President and Fatah leader Mahmoud Abbas met Khaled Meshaal, exiled leader of the radical Hamas movement, which rules the Gaza strip, in Cairo.

An Israeli official in Prime Minister Benjamin Netanyahu's office said agreement between the rival Palestinian factions would only harden Israel's stance against releasing the funds.

No final decision has been made on the transfer of funds, but had an agreement been signed today in Cairo, there is no way they would have been released, said the official, who declined to be named.

Fayyad reiterated that he was willing to step down if it would help heal divisions between the factions and pave the way for presidential and parliamentary elections. Hamas has rejected him as head of a joint government.

Norway chairs a committee of aid donors to the Palestinian Authority, including the United States, Israel and the European Union.

(Reporting by Walter Gibbs, additional reporting by Ori Lewis in Jerusalem, Editing by Mark Heinrich and Louise Ireland)