"These measures were agreed ... as punishment after the vote at UNESCO," a senior government official told AFP on condition of anonymity.
"We will build 2,000 housing units, including 1,650 homes in east Jerusalem and the rest in the settlements of Maaleh Adumim and Efrat," he said, referring to a sprawling settlement east of Jerusalem and another between Bethlehem and the southern city of Hebron.
"It was also decided to temporarily freeze the transfer of funds to the Palestinian Authority," he added.
Every month, Israel transfers to the Palestinian Authority tens of millions of dollars in customs duties which are levied on goods destined for Palestinian markets that transit through Israeli ports, and which constitute a large percentage of the Palestinian budget.
Israel often freezes the transfer of funds as a punitive measure in response to diplomatic or political developments viewed as harmful.
A statement from Netanyahu's office said the decisions were taken during a "first discussion" of the UNESCO issue and further steps would be considered at the next meeting of the so-called Forum of Eight senior ministers.
The announcement drew an angry response from the Palestinians, with presidential spokesman Nabil Abu Rudeina calling on the Middle East Quartet and the US administration to "put an end to this recklessness" which he warned would have "negative consequences" for the whole region.
"The Israeli decision to speed up settlement construction with the construction of 2,000 new housing units is an Israeli decision to accelerate the destruction of the peace process," he told AFP.
"And the freezing of funds is stealing money from the Palestinian people."
The Palestinian request for UNESCO membership was approved by the UN cultural organisation's general assembly at at a vote in Paris on Monday, despite strong opposition from the United States and Israel.
Both Washington and Israel had lobbied the organisation to delay the vote, with the Jewish state warning that the membership bid was unilateral and would jeopardise the chances of reviving negotiations.
It was also likely to cost UNESCO its US funding, which makes up 22 percent of its budget, because US law requires Washington to cut funds to any UN organisation that admits Palestine as a full member.
Israel is also reportedly considering withdrawing the special permits granted to top Palestinian officials that allow them to move between the West Bank and Israel with relative ease.
Earlier on Tuesday, Palestinian servers across the West Bank and Gaza Strip were attacked, cutting all Internet access, with Palestinian communications minister Mashur Abu Daqqa saying he suspected Israel was involved.
"I think from the manner of the attack and its intensity, that there is a state behind it," he told AFP. "Israel could be involved as it announced yesterday it was considering the kind of sanctions."
News of the UNESCO vote sparked an angry condemnation from Israel's foreign ministry which described it as a "unilateral Palestinian manoeuvre that will bring no change on the ground but further remove the possibility for a peace agreement."
Netanyahu also attacked the move as yet another Palestinian attempt to seek "a state without a deal."
"We won't sit around idly in the wake of these moves that harm Israel and are a crude violation of the most elementary commitment the sides took upon themselves in the peace process -- to solve the conflict between us through negotiations only," he said on Monday.
Winning membership in UNESCO will allow the Palestinians, who previously held observer status at the organisation, to apply to classify natural and cultural sites as World Heritage Sites.
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