The West Bank-based Palestinian Authority has told Israel that it will stop paying for electricity supplied to the Gaza Strip, Israeli officials say.
There was no confirmation from the PA. But President Mahmoud Abbas has threatened "unprecedented steps" to end the political division with the rival Hamas movement, which dominates Gaza.
Hamas called Thursday's move "a grave escalation and an act of madness".
Gaza's 1.9 million inhabitants already endure lengthy blackouts.
The United Nations says there is no electricity in the coastal territory for up to 20 hours per day, meaning that basic services are "grinding to a halt".
On Thursday, the Israeli military's Co-ordinator of Government Activities in the Territories (Cogat) announced that it had been notified by the PA that payments for electricity supplied to Gaza would stop immediately.
Israel currently provides Gaza with 125MW, which accounts for 55% of the territory's usual electricity supply. Israeli media say the cost is about $11m a month, which Israel deducts from tax revenue collected on behalf of the PA.
Israel does not deal directly with Hamas, which it considers a terrorist organisation.
In 2006, Hamas won Palestinian Legislative Council elections. It reinforced its power in Gaza the following year after a violent rift with Mr Abbas' Fatah faction.
The rival groups agreed to the creation of a unity government in 2014, but it never got off the ground in Gaza.
On 12 April, Mr Abbas said Palestinians faced a "dangerous and tough situation" and that he was "going to take unprecedented steps in the coming days to end the division".
He did not elaborate, but the PA has already cut the salaries of civil servants based in Gaza and taxed Israeli fuel for Gaza's sole power plant.
On Wednesday, Prime Minister Rami Hamdallah said the salary cuts would stay in place until Hamas moved towards reconciliation.
"I think there is a golden and historic chance to regain the unity of our people," he said. "Hamas should relinquish control of Gaza."
On 17 April, the Gaza Power Plant, which produced about 30% of the territory's electricity supply, was forced to shut down completely after exhausting its fuel reserves and being unable to replenish them due to a shortage of funds.
Days later, malfunctioning power lines coming from Egypt, which accounts for 15% of the supply, exacerbated the outages.
That left Gaza totally reliant on electricity purchased from Israel.
The UN has expressed particular concern about the impact of the blackouts on Gaza's hospitals, which already rely on back-up generators and whose fuel reserves are expected to be exhausted within days.
The frequency of water supplies to homes has also been reduced, with desalinisation plants operating at a third of their capacity, and wastewater treatment has largely halted, resulting in the discharge of some 110m litres (24m gallons) of raw or poorly-treated sewage into the sea.
Gaza's electricity supply has been also affected by restrictions on the import of goods imposed by Israel as part of a land, sea and air blockade that is now in its 10th year. Egypt is meanwhile blockading Gaza's southern border.
Israel and Egypt maintain the blockades as a measure against attacks by Islamist militants based in Gaza.