The move to cut off about $127 million a month in funding follows Palestinian President Mahmoud Abbas' decision to push for joining the International Criminal Court.
Membership in the ICC could allow the Palestinians a means to pursue war crimes charges against Israel. But the move is likely to draw sharp response from Israel and the U.S.
The proposal failed to get the necessary nine votes to pass. The Palestinian plan called for, among other things, an end to the Israeli occupation by late 2017.
Israeli authorities released a photo of a 2000-year-old lice comb that was captured along with the men, who are accused of stealing objects from the area where the Dead Sea Scrolls were found.
The prime minister has more than two years left in his term. But with his coalition fracturing, Benjamin Netanyahu said it was "impossible" to lead a government under the current conditions.
Israel's prime minister says the country needs to be officially defined as a Jewish state, but opponents say that would undermine its goal of equality for all.
The bill, which must be approved by Parliament, defines Israel as "the nation-state of the Jewish people." It has angered not only Israel's Arab citizens, but also members of the coalition government.
After a deadly attack by a Palestinian militant last month, Israel blew up his apartment. Israel says the aim is deterrence, while others call it collective punishment.