JERUSALEM (Reuters) - Israel will reduce monthly transfers of tax collected on behalf of the Palestinians in what aides to Prime Minister Benjamin Netanyahu described as a response to the killing of two Israelis in Palestinian attacks in the occupied West Bank this week.

The amount deducted from about $130 million sent to the Palestinian Authority (PA) each month will be equal to stipends it pays militants in Israeli prisons and the families of jailed or slain militants, Netanyahu's office said on Friday.

The move, which follows the killings of an Israeli man and girl in the West Bank this week, will be a blow to the already weak finances of the Western-backed Palestinian Authority (PA).

"Incitement and payouts to terrorists and their relatives constitute an incentive to murder," Netanyahu's office said in a statement announcing the funding cuts, effective immediately.

Under interim peace deals from the 1990s, Israel collects tax revenues on behalf of the PA, which exercises limited self-rule. The monthly duties currently amount to between $130 million and $155 million, Israeli and Palestinian officials say.

The cash is crucial to running the PA and paying public-sector salaries. Israel withheld tax money in 2012 and 2015 in response to Palestinian moves for statehood recognition abroad.

Palestinians condemn such measures as collective punishment.

"The decision to freeze a part of the tax revenues is a theft and piracy of money that belongs to the Palestinian people," Wasel Abu Youssef, a senior official with the umbrella Palestine Liberation Organisation, told Reuters.

Friday's statement by Israel did not specify how much money it would now cut. That may depend on whom it deems militants.

According to retired Israeli intelligence official Yosef Kuperwasser, in 2015 the PA paid out around $13.4 million a month to the next-of-kin of "martyrs" -- a term it applies to all Palestinians killed by Israeli forces, whether they were carrying out militant attacks or were non-combatants.

PA officials did not immediately confirm that account.

One PA official, speaking on condition of anonymity, said the PA also now pays some $10.9 million each month to Palestinians jailed on charges ranging from murder and espionage to stone-throwing, fund-raising for banned groups and inciting against Israel on social media.

Were Israel to deduct both sums fully from the monthly tax handovers, that would potentially‮ ‬constitute a cut of between 16 percent and 18 percent.

(Writing by Dan Williams, Ali Sawafta and Nidal al-Mughrabi; Editing by Mark Heinrich and Catherine Evans)