* Ban doesn't apply to peace negotiators, security officials
* Palestinians say edict undermines U.S. bid to save talks
* Netanyahu announces move after Kerry criticism of Israel
* Israel weighs adding economic sanctions, too - official (Adds Kerry comment, says he seeks a way forward)
By Jeffrey Heller
JERUSALEM, April 9 (Reuters) - Israel announced on Wednesday a partial freeze in high-level contacts with the Palestinians and also threatened economic steps after they signed international conventions, deepening a crisis menacing U.S.-brokered peace talks.
Israeli government officials said Prime Minister Benjamin Netanyahu had ordered cabinet members, directors-general of government ministries and other senior officials not to meet their counterparts in the Palestinian Authority (PA).
A spokesman for the PA, which exercises limited self-rule in the Israeli-occupied West Bank, said Israeli-Palestinian ministerial meetings were rare but voiced concern about the possibility of Israeli economic sanctions.
The order does not apply to Justice Minister Tzipi Livni, Israel's chief peace negotiator, or to defence and security officials, Israeli officials said. A U.S. mediator has held a series of meetings over the past week to try to push the troubled talks past an original April 29 deadline for a deal.
"This decision undermines all international efforts ... to revive the negotiations, to proceed with a constructive solution to the challenges facing the peace process," said Palestinian Authority spokesman Ehab Bseiso.
An Israeli official said Netanyahu had issued the order in response to "the Palestinians' grave violation of their commitments in the framework of the peace talks" - a reference to the signing of 15 international agreements last week.
The ban was imposed just hours after U.S. Secretary of State John Kerry suggested that Israel's announcement on April 1 of plans to build about 700 housing units in East Jerusalem, which Palestinians want for the capital of a future state, was the immediate cause of talks plunging into crisis.
Washington described the Israeli decision as "unfortunate."
Kerry, meeting in Washington with Israeli Foreign Minister Avigdor Lieberman, said: "We are working hard to try to find a way forward. And both parties indicate they would like to find a way to go forward in the talks."
Kerry's comments in testimony to Congress on Tuesday raised eyebrows in Netanyahu's governing coalition. "To accuse us of causing this? I think he's wrong," Internal Security Minister Yitzhak Aharonovitch told Israel Radio.
At his congressional appearance, Kerry said both sides had taken "unhelpful" steps in recent days and that he hoped they would find a way to resume serious negotiations, noting they had held a lengthy meeting on Monday.
An Israeli official told Reuters that Israel had taken what he called "very modest steps" after the Palestinians signed the conventions. "If they (the Palestinians) continue on this path, we have other options," the official said.
ADDITIONAL SANCTIONS WEIGHED
Another punitive Israeli step under "serious consideration" was to deduct up to $75 million in tax revenue transfers to the Palestinians, the Israeli official said.
Citing Palestinian figures, Israel estimates this is the sum of annual Palestinian aid provided to their prisoners in Israeli jails convicted of violence, including lethal attacks.
Under 1990s interim peace deals, Israel collects and transfers to the PA some $100 million a month in taxes on goods imported into the Palestinian territories. Israel has previously frozen the payments during times of heightened tension.
Palestinian officials said Palestinian President Mahmoud Abbas had signed the international agreements, including the Geneva Conventions covering the conduct of war and occupation, in response to Israel's failure to carry out a promised release of several dozen Palestinian prisoners a few days earlier.
Palestinians were further angered by the subsequent April 1 announcement on settlements.
At a cabinet session on Sunday, Netanyahu pledged to retaliate for Abbas's move, which Israel sees as a unilateral step toward statehood and an attempt to gain leverage over it.
Israel had conditioned freedom for the fourth and last group of the 104 prisoners it had pledged to release, when peace talks restarted last July, on a Palestinian commitment to extend the negotiations beyond April.
It said the tender to build new houses in East Jerusalem, had been issued last year and was resubmitted because there had been no initial takers.
Palestinians fear settlements, built on land Israel captured in a 1967 war, could deny them a viable state. Most countries consider the settlements illegal. Israel cites historical and Biblical links to the West Bank and Jerusalem and says it intends to keep major settlement blocs in any future peace deal. (Additional reporting by Allyn Fisher-Ilan and Ari Rabinovitch in Jerusalem, Noah Browning in Ramallah and Patricia Zengerle in Washington; Editing by Crispian Balmer and Mark Heinrich)
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