The leaders of 21 humanitarian aid groups wrote to the Trump government on Wednesday to object "in the strongest terms" to a decision to withhold $65 million (Dh238.7m) in planned US contributions to the UN agency that serves Palestinian refugees.
The US State Department said last week that Washington would withhold $65m it had planned to pay the United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNRWA), saying it needed to make unspecified reforms.
The leaders of the aid groups warned of "dire consequences" if the cut was maintained, according to the letter.
“We are deeply concerned by the humanitarian consequences of this decision on life-sustaining assistance to children, women and men in Jordan, Lebanon, Syria, and the West Bank and Gaza Strip," the letter said.
State Department spokeswoman Heather Nauert on Thursday denied the move was meant to punish Palestinians, who have been sharply critical of president Donald Trump's announcement last month that he would move the US embassy to Jerusalem from Tel Aviv.
She repeated the US view that UNRWA needs reform, saying there are a lot more refugees in the programme than previously, and that "money coming in from other countries needs to increase".
Eric Schwartz, president of Refugees International and former US assistant secretary of state for population, refugees and migration, said the comments by Nikki Haley, the US Ambassador to the UN, was aimed at punishing Palestinian political leaders and forcing them to make political concessions.
"But it is wrong to punish political leaders by denying life-sustaining aid to civilians. This is a dangerous and striking departure from US policy on international humanitarian assistance which conflicts starkly with values that US administrations and the American people have embraced," Mr Schwartz said in the letter.
The State Department also said on Thursday that the US would not provide a separate $45m in food aid for Palestinians that it pledged last month as part of the West Bank/Gaza Emergency Appeal led by UNRWA.
Ms Nauert said the US had made clear to UNRWA that the $45m was a pledge aimed at helping the agency with "forecasting", but it was not a guarantee.
Mr Trump said in a Twitter post on January 2 that the US gives Palestinians hundreds of millions of dollars a year, but gets "no appreciation or respect".
The decisions to curb funding are likely to compound the difficulty of reviving Israeli-Palestinian peace talks as well as further undermine Arabs' faith that the US can act as an impartial arbitrator.
The last talks collapsed in 2014, partly due to Israel's opposition to an attempted unity pact between the Palestinian factions Fatah and Hamas, and because of Israeli settlement building on occupied land that Palestinians seek for a state, among other factors.