Behind the scenes: The banking correspondence authorization will end on Oct. 31 and the U.S. and many of its allies are concerned Smotrich is not going to extend it, U.S. officials said.

During a meeting in recent weeks of treasury and finance officials from the governments of the G7 countries, the U.S. raised its concerns about Smotrich and the Palestinian banks, an official from one of the G7 countries said.

The G7 official said the U.S. warned that if the Palestinian banks are cut off from Israeli banks it could significantly destabilize the West Bank and create a violent escalation that would spill over into Israel.

The West Bank would turn into a "cash economy" that could benefit terrorist organizations that largely use cash to operate, the G7 official said.