Israeli Prime Minister Benjamin Netanyahu has bowed to Chinese pressure and barred intelligence officers from testifying in a US lawsuit against the Bank of China, a newspaper reported on Monday.

The Yediot Aharonot, a top-selling daily in Israel, said Netanyahu's actions had irked the United States.

Its report referred to a lawsuit filed in a New York court in 2008 by families of victims of "terrorist attacks" that rocked Israel between May 2004 and January 2007.

They claim the Islamist Palestinian groups Hamas and Islamic Jihad transferred through the Bank of China millions of dollars which were allegedly used to fund the deadly attacks.

Netanyahu made a five-day state visit to China in May and, according to Yediot, the Beijing leadership invited him on the condition he prevents Israeli intelligence officers from testifying in the lawsuit.

Lawyer Nitsana Darshan-Leitner, who represents 22 Israeli families, some of whom have lost relatives in the attacks, slammed Netanyahu for yielding to pressure from China.

"Netanyahu, who wants to show that he is at the forefront of the fight against terrorism, has given in to considerable pressure from China," she told AFP.

Netanyahu's office has refused to comment the claims, while a senior government official sought to defend the premier.

"I'm convinced that the prime minister is fully engaged in the fight against terrorism," Yuval Steinitz, the minister in charge of international relations, strategic affairs and intelligence, told public radio.

"But he also knows how to defend the interests of the State of Israel," Steinitz added without elaborating.

But Netanyahu's actions may have harmed ties with top ally the United States by effectively refusing to cooperate with the American judiciary, Yediot reported.

It said Israel's ambassador to Washington, Michael Oren, had travelled to Jerusalem in recent days and met Netanyahu to "inform him that the US adminstration is very upset".

Yediot also said plaintiffs who filed the lawsuits have said Israeli officials asked the Bank of China to put an end to such transfers in 2005, but it allegedly ignored their requests.

The Bank of China has denied these allegations and said it respect UN regulations concerning money laundering and funding terrorism, the newspaper said.