Yellen revealed the shift at a news conference in Brazil, saying that the revenue transfers "must continue," but warning that Israeli restrictions on the movement of Palestinian workers was stalling commerce in both the West Bank and Israel.

Speaking ahead of a G20 finance leaders meeting, Yellen said she raised the issue in a letter to Israeli Prime Minister Benjamin Netanyahu in the past two days.

"Blocking West Bank residents from working in Israel, it has a very significant negative effect on incomes in the West Bank. And Israel is also dependent on that labor force," Yellen said, adding that labor shortages were also hurting Israel's economy.

Palestinian leaders say their ability to govern has been effectively blocked by Israeli restrictions, including withholding of tax revenues due under the Oslo accords signed 30 years ago.

For months, the Authority has been unable to pay full public sector salaries because of a row over the refusal by the Israeli finance ministry to release part of the funds.

U.S. President Joe Biden and his administration have backed Israel's attacks on Gaza as necessary to root out Hamas after the group's Oct. 7 assault on Israel in which 1,200 were killed and more than 200 taken hostage. U.S. officials have taken a more critical stance on Israel's onslaught in recent weeks as the death toll in Gaza nears 30,000.

Washington recently imposed sanctions on four Israeli men accused of being involved in settler violence and on Friday for the first time called Israel's expansion of settlements inconsistent with international law.

Yellen said she "wanted to weigh in" on the Israeli revenue and labor restrictions because the Treasury has been involved in these issues.

U.S. officials have expressed grave concerns that the conflict in Gaza will spread to the West Bank and beyond. Resuming tax transfers to the Palestinian Authority is expected to help quell possible protests or riots in the occupied Territories, a U.S. administration source said.

SPILLOVERS LIMITED

Yellen said Washington had not seen a significant impact on the global economy as a result of the conflict, but would continue to monitor the situation closely.

"We've worked very hard to make sure that the conflict between Israel and Gaza and Hamas doesn't expand into a larger regional conflict, but were it to do so, there could be significant economic spillovers. Fortunately, we haven't seen that."

Treasury declined to release a copy of Yellen's letter.

Yellen said the United States was also working with the humanitarian sector to help assist innocent Palestinians and get legitimate aid to where it is most needed.

"We continue to explore options for strengthening the West Bank economy" following an executive order issued by President Joe Biden earlier this month, Yellen said in prepared remarks.

Yellen said Washington supported the World Bank’s commitments to emergency food security assistance in Gaza and economic support for the West Bank, and other ongoing loan programs by regional development banks and the International Monetary Fund in neighboring Egypt and Jordan.

She noted that Washington had also led efforts to counter the financing of Hamas and responded to Houthi attacks in the Red Sea.