UNRWA spokesman Christopher Gunness said last week that the tunnel "has no entry or exit points on the premises nor is it connected to the schools or other buildings in any way", and promised it would be sealed by the UN-affiliated agency.
On Monday, Defense Minister Avigdor Liberman said, "It is inconceivable that Hamas collects taxes from Gaza residents and they go to tunnels and rockets and not to Gaza's development of the electricity and water sectors". The United States, Israel's main ally, was the biggest donor to UNRWA a year ago, pledging $368 million.
In public remarks to his cabinet at its weekly meeting, Netanyahu said UNRWA perpetuated, rather than solved, the Palestinian refugee problem and that it stoked anti-Israeli sentiment.
Referring to a meeting he held in Jerusalem on Wednesday with Nikki Haley, the USA ambassador to the UN, Netanyahu said: "I told her it was time the United Nations re-examine UNRWA's existence". Israel decided not to intervene in internal Palestinian struggles and followed his lead. And these millions have the U.N. High Commission for Refugees (UNHCR), while most of the Palestinian refugees are settled and have a separate commission. In 2016, it extended UNRWA's mandate to 2019.
Israel's envoy to the UN Danny Danon submitted a letter of protest to the United Nations Security Council, asking it to "strongly and unequivocally condemn Hamas and its repeated abuse of civilian infrastructure and designate this group as a terrorist organization".
Hamas denied the accusations, calling them "Israeli fabrications".
Hamas spokesman Abdulatif al-Qanou says Monday Israel's decision to do so would be "dangerous and catastrophic".
"This is not the first time the Israeli government tries to spread such lies in order to destroy the work of UNRWA in helping Palestinian refugees get their education".
On Wednesday, Netanyahu said he told Nikki Haley, the US ambassador to the United Nations, during a visit to Israel, that it was time for the United Nations to "re-examine UNRWA's continued existence". But the discovery of a terror tunnel beneath two UN-run schools made some question whether the UNRWA was actually surprised by it or whether it was secretly colluding with a terror group. During her trip, she surveyed a Hamas-dug attack tunnel that was discovered three years ago.
On Sunday, the Israeli security cabinet chose to further reduce supply of electricity to Gaza after coordinating with Palestinian Authority (PA) President Mahmoud Abbas, who is the political rival of the Islamist group Hamas which controls Gaza. Since then, it has conducted three major assaults on the territory.