UNESCO designated Hebron and the two adjoined shrines at its heart - the Jewish Tomb of the Patriarchs and the Muslim Ibrahimi Mosque - a "Palestinian World Heritage Site in Danger".
Israeli Prime Minister Benjamin Netanyahu called that "another delusional UNESCO decision" and ordered that $1 million be diverted from Israel's UN funding to establish a museum and other projects covering Jewish heritage in Hebron.
The funding cut is Israel's fourth in the past year, taking its UN contribution from $11 million to just $1.7 million, an Israeli official said. Each cut has come after various UN bodies voted to adopt decisions which Israel said discriminated against it.
Hebron is the largest Palestinian city in the occupied West Bank with a population of some 200,000. About 1,000 Israeli settlers live in the heart of the city and for years it has been a place of religious friction between Muslims and Jews.
Jews believe that the Cave of the Patriarchs is where Abraham, Isaac and Jacob and their wives, are buried. Muslims, who, like Christians, also revere Abraham, built the Ibrahimi mosque, also known as the Sanctuary of Abraham, in the 14th century.
Even before Netanyahu's budget announcement, Internal Security Minister Gilad Erdan signaled Israel would seek to further make its mark at the Hebron shrine, tweeting: "UNESCO will continue to adopt delusional decisions but history cannot be erased ... we must continue to manifest our right by building immediately in the Cave of the Patriarchs."