The US has been accused of "blackmail" after cutting a sizeable chunk from the total aid it sends to the Palestinian Territories.
The State Department said it was not longer providing more than $200m (£155.7m) in bilateral aid following a review of funding for projects in the West Bank and Gaza.
Palestinians attacked the decision, with a senior official in Ramallah describing it as "coercion".
Hanan Ashrawi, a member of the ruling Palestine Liberation Organisation's (PLO) executive committee, said: "The US administration is demonstrating the use of cheap blackmail as a political tool.
"The Palestinian people and leadership will not be intimidated and will not succumb to coercion. The rights of the Palestinian people are not for sale."
A spokesman for PLO chair Mahmoud Abbas said the move was meant to force Palestinians to abandon their claim to Jerusalem.
Nabil Abu Rdeneh reasserted that there would be no peace without east Jerusalem as capital of a Palestinian state.
In January, Donald Trump threatened to cut off aid after the Palestinian Authority (PA) – which controls the West Bank – boycotted peace talks.
The Palestinians had pulled out of negotiations after the US president said he would recognise Jerusalem as Israel's capital.
Mr Trump is yet to comment but the State Department said the review had been undertaken "at the direction of (the) president".
Mr Trump's administration is understood to be preparing to outline a peace plan for Israel and the Palestinians.
The State Department approved $230.1m in economic support for the PA in 2017, of which $25m for a hospital network remains under review.
Some $65m of US funds intended to go towards United Nations relief work in the Palestinian Territories, Gaza, Jordan and Lebanon has also been frozen.
That sum is not included in the $200m in aid withdrawn from the Palestinian Territories, the Associated Press reported.
According to the Times of Israel, the US gives around $600m (£467m) in aid annually to the Palestinians, made up of USAID cash, further aid to support the rule of law and order and more to allow relief work.
Earlier this year, Mr Trump signed into law the Taylor Force Act, which proposed the halting of US economic aid to the PA until it stops providing payments to the families of citizens who commit acts of "terrorism" and are dead or imprisoned in Israel.
The funding that has been cut from the Palestinian aid budget would "now address high-priority projects elsewhere", the State Department said.