The United States downgraded its mission to the Palestinian people and merged it with its Israeli embassy on Monday.
A US State Department statement says the move will improve the efficiency of American diplomatic operations, but Palestinian officials say it will harm Washington's relationships in the region.
Both the missions and teams of US Consulate General in Jerusalem and the US Embassy in Jerusalem – which moved from Tel Aviv last year, leading to international criticism and protests across Palestine – will be merged, leaving US Ambassador to Israel David Friedman in charge of missions to both countries.
The United States diplomatic office for Palestine will now be the US Embassy Palestinian Affairs Unit, not a consulate as it was.
US Secretary of State Mike Pompeo said the move first announced in October will not constitute a change in policy and is intended to improve "efficiency and effectiveness".
"The Administration remains fully committed to efforts to achieve a lasting and comprehensive peace that offers a brighter future to Israel and the Palestinians," the State Department statement said, adding that the move does not represent a change in United States policy on Middle East peace.
The move comes amid a trend of defunding, delegitimising and disengaging with Palestinians by the Trump administration.
"The Trump administration is intent on leaving no room for doubt about its hostility towards the Palestinian people and their inalienable rights as well as its abject disregard for international law and its obligations under the law," senior Palestinian official Hanan Ashrawi said in a statement.
Under President Donald Trump, the United States has cut more than $500 million in Palestinian aid, moved the US embassy in Israel to Jerusalem, closed the Palestinian mission in Washington and now downgraded their Palestinian mission.
Meanwhile, Mr Trump's son-in-law Jared Kushner is due to announce his long-awaited Middle East peace plan.