The United States on Friday halted all funding to a UN agency that helps Palestinian refugees – a move likely to further heighten tensions between the Palestinians and the US government.
A spokesman for Palestinian President Mahmoud Abbas denounced the decision as "a flagrant assault against the Palestinian people and a defiance of UN resolutions".
State Department spokeswoman Heather Nauert said the business model and fiscal practices of the United Nations Relief and Works Agency (UNRWA) were an "irredeemably flawed operation".
"The administration has carefully reviewed the issue and determined that the United States will not make additional contributions to UNRWA," she said.
Ms Nauert said the agency's "endlessly and exponentially expanding community of entitled beneficiaries is simply unsustainable and has been in crisis mode for many years".
UNRWA says it provides services to about five million Palestinian refugees in Jordan, Lebanon, Syria and the West Bank and Gaza. Most are descendants of people who were forced out of Palestine in the 1948 war that led to the creation of the state of Israel.
US President Donald Trump and his aides say they want to improve the Palestinians' plight, as well as start negotiations on an Israeli-Palestinian peace agreement.
But under Mr Trump, Washington has taken a number of actions that have alienated the Palestinians, including the recognition of Jerusalem as Israel’s capital. That move – a reversal of longtime US policy – led Palestinian leadership to boycott Washington's peace efforts.
The US paid $60 million to UNRWA in January but withheld another $65 million pending a review.
"Such a punishment will not succeed to change the fact that the United States no longer has a role in the region and that it is not a part of the solution," Abbas spokesman Nabil Abu Rdainah told Reuters.
He said "neither the United States nor else will be able to dissolve” UNRWA.
In Gaza, the Islamist group Hamas condemned the US move.
"The American decision aims to wipe out the right of return and is a grave US escalation against the Palestinian people," said Hamas spokesman Sami Abu Zuhri.
Mr Abu Zuhri told Reuters the "US leadership has become an enemy of our people and of our nation and we will not surrender before such unjust decisions".
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Earlier on Friday, German Foreign Minister Heiko Maas said Germany would increase its contributions to UNRWA because the funding crisis was fuelling uncertainty. "The loss of this organisation could unleash an uncontrollable chain reaction," Mr Maas said.
UNRWA has faced a cash crisis since the United States, long its biggest donor, slashed funding earlier this year, saying the agency needed to make unspecified reforms and calling on the Palestinians to renew peace talks with Israel.
The last peace talks collapsed in 2014, partly because of Israel's opposition to an attempted unity pact between the Fatah and Hamas Palestinian factions and to Israeli settlement building on occupied land that Palestinians seek for a state, among other factors.