UN Relief and Works Agency, known as UNRWA, now provides aid mostly in the form of education, healthcare, food security and other essentials, to some 800,000 Palestinians registered as refugees in the West Bank and 1.3 million people in the Gaza Strip, as well as 534,000 in Syria, 464,000 in Lebanon and 2 million in Jordan.
Nabil Abu Rudeneh said the move "does not serve peace but rather strengthens terrorism in the region".
"The situation of Palestinians is defined by great anxiety and uncertainty, first because Palestinian refugees do not see a solution to their plight on the horizon", Pierre Krahenbuhl, UNRWA's director told a UN conference. "Whatever the size of the conspiracies aimed at liquidating the Palestinian cause, this will only increase the steadfastness of the Palestinian people and its leadership".
The State Department announced in a written statement Friday that the United States "will no longer commit further funding to this irredeemably flawed operation". The decision cuts almost $300 million of planned support.
The UN says there are about 5 million Palestinian refugees, including the descendants of people who fled the 1948 war.
The US has been the largest donor to the United Nations Relief and Works Agency (Unrwa) - but now says the organisation is "irredeemably flawed". Palestinian leaders assert the right of those refugees to return to land now under Israeli control. Israel has long argued the agency was politicized, ineffective and merely perpetuated the refugee crisis.
"An immediate and capricious cut off of UNRWA funding ... risks collapsing the Palestinian Authority, empowering Hamas, and shifting the responsibility of health, education, and ultimately security services to the Israelis", Dave Harden was quoted as saying.
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The governments listed in the report have yet to respond despite receiving an advanced copy. The Yemeni conflict has escalated over the last few months, especially in Al Hudaydah.
President Trump also appears unhappy with how United States aid to the region has been received.
The US decision comes as President Donald Trump and his Middle East pointmen, Jared Kushner and Jason Greenblatt, prepare for the rollout of a much-vaunted but as yet unclear peace plan for Israel and the Palestinians, and it could intensify Palestinian suspicions that Washington is using the humanitarian funding as leverage. But, he said, it will do little to change these people's status as refugees.
The Palestinian leadership has been hostile to any proposal from the Trump administration, claiming it is bias in favour of Israel. The Palestinian Authority broke off contact with the USA after the Jerusalem announcement.
He welcomed increased and new donations from other members of the worldwide community which he said had gone some way to filling a funding gap created when the United States initially chose to reduce its contributions to UNRWA early this year. Speaking at the Foundation for Defense of Democracies think tank, Haley also said, "we have to look at right of return" of those classified as Palestinian refugees.
Why did the USA cut funding?
Some in Israel have even tougher criticism, accusing UNRWA of teaching hatred of Israel in its classrooms and tolerating or assisting Hamas militants in Gaza.
"In the context of Israel's "Jewish nation state" law, the USA recognition of Jerusalem, and moves towards annexation of West Bank territory", White wrote, "those seeking the elimination of UNRWA envisage its demise to be a crucial part of the consolidation of an apartheid, single state, and the defeat of the Palestinian struggle".