Israeli Prime Minister Benjamin Netanyahu is to freeze money transfers to the Palestinians after the murder of a young teenage settler in Jerusalem last week, he said on Sunday.

Many of the details of the murder of 19-year-old Ori Ansbacher have been kept private by the Israeli military and police for security reasons but Israeli forces have arrested a 29-year-old Palestinian man on suspicion of her murder.

The man, from the West Bank city of Hebron, is alleged to have raped and murdered her in an attack that Israel’s internal security service known as the Shin Bet said on Sunday was nationalistic in motive.

Ansbacher's body was found late Thursday in southeast Jerusalem, and she was buried the next day in her Israeli settlement of Tekoa.

Mr Netanyahu, who is campaigning for re-election in April elections called early as he faces a series of corruption allegations, has appeared to bow to far-right pressure to cut off funds to the Palestinians.

Israel’s hard-right ministers have clamoured for the suspect to be executed and called for Palestinian attackers to face the death penalty.

Israel collects around $127 million a month in customs duties levied on goods destined for Palestinian markets that transit through Israeli ports and then transfers it to the PA.

"By the end of the week, the staff-work necessary for implementing the law on deducting terrorists' salaries will be completed," Mr Netanyahu told journalists at the start of the weekly cabinet meeting.

"Next Sunday I will convene the security cabinet and we will approve the necessary decision to deduct the funds. Let nobody doubt, the funds will be deducted, at the start of next week," the Israeli leader said.

Palestinian civil affairs minister Hussein Al Sheikh said the PA would not go along with Israel withholding any part of the tax money due.

"The Palestinian Authority will refuse to receive any cleared funds if Israel deducts a penny from it," he said.

He did not say what the PA's next step would be.

The Israeli army said Sunday it had started preparations to demolish the West Bank home of the Palestinian suspected of Ansbacher's killing.