A bill that opponents say targets Israeli human rights groups critical of Israel's policies towards the Palestinians won initial approval in parliament on Monday with the support of right-wing parties.
Called a "transparency bill" by its sponsor, far-right Justice Minister Ayelet Shaked, the legislation would require NGOs to give details of overseas donations in all their official publications if more than half their funding comes from foreign governments or bodies such as the European Union.
The United States and European Union have raised their concerns publicly and privately about the legislation as well as moves against dissenting voices in the NGO community and in the arts and media under the government of Prime Minister Benjamin Netanyahu.
Opponents of the proposed law say it is discriminatory because it is mainly groups that oppose the policies of Israel's administration towards Palestinians which receive money from foreign governments and the EU.
Private funds from overseas, such as money donated to Israeli groups that support Jewish settlements on occupied land Palestinians seek for a state, are not addressed in the bill.
In a statement before the parliamentary vote, the Association for Civil Rights in Israel called the NGO bill a "discriminatory law that harms democracy ... (and) supports censorship and political persecution".
Netanyahu, defending the legislation as "democratic and necessary", has seemed to allude to foreign monetary support for Israeli groups backing Palestinian statehood.
Addressing members of his conservative Likud party last week, Netanyahu drew parallels with Spain's Basque country where various separatist groups used peaceful or violent means to further their cause. "Try to imagine Israel funding Basque independence organisations," he said.
More than 30,000 NGOs are registered in Israel, about half of them active. Around 70 of those groups deal with the Israeli-Palestinian conflict and receive funds either from the EU as a whole, or individual member governments, including Denmark, Sweden and Belgium, as well as non-member Norway.
To become law, the bill needs to pass three votes in parliament, where Netanyahu's coalition governs by a one-seat majority and carefully shores up support for its legislation before putting it on the agenda.
It received preliminary approval in the Knesset late on Monday and now goes to a committee for final drafting before a second and third vote at a separate parliamentary session.
The debate coincides with high tensions between Palestinians and Jews as Israel grapples with near-daily Palestinian stabbings, shootings and car rammings that have hardened right-wing sentiments within Netanyahu's government.
Other rightist initiatives include an attempt by Culture Minister Miri Regev to deny government funding to any arts institution whose programmes "subvert the state", and a campaign by an ultranationalist advocacy group against "disloyal" left-wing artists. After widespread condemnation, it was withdrawn.
Opponents have compared such proposals with U.S. Senator Joseph McCarthy's campaign in the 1950s to expose Communist sympathisers, including in Hollywood and the arts.
Both Shaked, a 39-year-old computer engineer, and Regev, 50, a former army spokeswoman, are widely seen as jockeying for leadership positions in their respective Jewish Home and Likud parties, in part by rocking liberal foundations.
Once the legislation reaches a parliamentary committee for fine-tuning, lawmakers are likely to focus on the possible removal of a widely-criticised clause that would require representatives of foreign government-funded NGOs to wear special identification badges when they visit the Knesset.
Shaked has said she was determined to crack down on those groups that take foreign money and then criticise Israel, accusing some NGOs of "eroding the legitimacy of Israel to exist as a Jewish and democratic state".
From the point of view of advocacy groups, the bill is a dangerous step that would put Israel in a category with the likes of Russia, Turkey and neighbouring Egypt, which often struggle to accept internal criticism and have either cracked down on some NGOs, or threatened to do so.
Several weeks ago, the U.S. ambassador to Israel met Shaked to discuss the legislation and took the unusual step of issuing a statement expressing Washington's concern and the need for governments to "protect free expression and peaceful dissent".
Peace Now, an Israeli NGO that tracks and opposes Jewish settlement in the occupied West Bank and East Jerusalem, has called the legislation "a hate crime against democracy".