But critics say Israel's actions are motivated by other considerations, namely that the testimony could jeopardize valuable trade ties with China.
"This motion asserts that Israel will forgive the supporters and perpetrators of acts of terror against Israelis and Jews. This is unacceptable," said Nitsana Darshan-Leitner, a lawyer representing 22 families of people who were killed in Palestinian suicide bombings. "Prime Minister (Benjamin) Netanyahu, by turning his back on the victims of terror, is not only denying justice to those who have paid the ultimate price, but he is sending a message to the terrorists and the whole world that Jewish blood is cheap."
The families accuse the government-owned Bank of China, through its U.S. branches, of serving as a key conduit in transfers of money to Hamas and Islamic Jihad, Palestinian groups that have killed hundreds of Israelis.
The family of Daniel Wultz, a 16-year-old American who was killed in a 2006 suicide bombing in Tel Aviv carried out by Islamic Jihad, is pursuing a separate but related case against the bank. Adding to the high profile of the case, Wultz's mother, Sheryl, is a cousin of U.S. House Majority Leader Eric Cantor. A representative for the Wultz family declined comment because they have not yet received the motion.
But Naftali Moses, whose son Avraham was murdered in a Jerusalem library in 2008, lashed out at the prime minister.
"Netanyahu's office promised to fight terror — and they are backing down," he said. "Netanyahu's office promised to aid us in our court case — and they have forgotten the victims of terror in favor of relations with the Chinese."
The families are seeking hundreds of millions of dollars in damages in U.S. courts. With claims based in part on U.S. anti-terrorism laws, a verdict against the bank could also potentially affect its ability to do business in the United States.
The cases depend heavily on the testimony of the former counter-terrorism agent, named Uzi Shaya, who has emerged as a key witness in determining how much the Bank of China knew about the financial transfers.
According to court documents, Shaya was part of a delegation of Israeli counterterrorism officials who met with Chinese officials in April 2005, warning them that Hamas and Islamic Jihad were transferring large sums of money to their militants through the Bank of China. At that meeting, the Israelis asked Chinese officials to "take action" to prevent further transfers.
Shaya was scheduled to appear for questioning in New York on Nov. 25. In an Aug. 29 letter to lawyers for the victims, Shaya said he wanted to testify but did not yet have permission to do so. Now it appears he won't get it.
In a statement released Saturday, the prime minister's office said while it was "steadfastly committed" to the security of its people, it was also obligated to ensure that information gathered by its officials remains confidential.
"After conducting a comprehensive review of the matter, the State of Israel concluded that it cannot allow the former official to be forced to disclose in foreign legal proceedings any information that came to his knowledge in the course of his official duties," the statement read. "The disclosure of such information would harm Israel's national security, compromise Israel's ability to protect those within its borders, and interfere with international cooperative efforts to prevent terrorism."