The Trump administration has cut more than $200 million in economic aid to the Palestinians.
Administration officials said Friday the decision was made after a review of the funding for projects in the West Bank and Gaza to ensure funds are spent in accordance with U.S. national interests and provide value to the U.S. taxpayer.
A senior State Department official said the agency will now direct the funds to "high-priority projects elsewhere."
The official said the decision takes into account the challenges the international community faces in providing assistance to Gaza, where "Hamas control endangers the lives of Gaza's citizens and degrades an already dire humanitarian and economic situation."
Hamas, the Palestinian Islamist group that runs Gaza, seized the coastal territory in 2007 from the internationally recognized Palestinian Authority. That led to Israel and Egypt placing severe economic restrictions on the region.
Israel says the economic blockade is needed to contain Hamas, a militant group that seeks Israel's destruction. It has greatly harmed Gaza's economy but failed to oust Hamas or ease the group's hold on power.
Hamas, which doesn't recognize Israel, is negotiating through Egypt to ease the blockade in exchange for a truce to end recent hostilities.
U.S. officials did not give an exact amount of the funds to be cut to the Palestinians.
The U.S. nonprofit group, J Street, which advocates for a peaceful end to the Israel-Palestinian conflict, strongly criticized the U.S. decision.
The group's Vice President of Government Affairs Dylan Williams called the move a "moral outrage and a major strategic blunder."
"These cuts will undermine Israel's security by exacerbating Gaza's humanitarian crisis and further destabilizing the difficult situation in the West Bank — increasing the prospects for violence and unrest," he added.
VOA's Cindy Saine contributed to this report.