Arab bank, based in Jordan, did not admit wrongdoing, but in a statement called the amount "unreasonably high".
The US Treasury Department's Office of the Comptroller of the Currency (OCC) and Financial Crimes Enforcement Network (FinCEN) levied the civil fine on Wednesday.
The fine approaches the record $25 million civil penalty imposed on Riggs Bank in May 2004, also for alleged violations of the Bank Secrecy Act.
Regulators said Arab Bank's New York branch failed to adequately guard against the risks of money laundering and terrorist financing, and also failed to properly report suspicious activities.
"It is vitally important that banks have effective anti-money laundering programmes in place to ensure that the financial system is not used to facilitate terrorism or criminal activity," Comptroller of the Currency John Dugan said in a statement.
The fine was assessed six months after the OCC ordered Arab Bank to take steps to preserve asset levels, pay off depositors and improve its internal controls.
It also forced the bank to convert the New York branch into a federal banking agency, ending the branch's wire transfer business.
Arab Bank said the branch had been "diligently" applying anti-money laundering controls to transactions initiated by direct branch customers, but did not believe the law required the same controls for wire transfers where the bank acted as an intermediary.
"[The fine was excessive] given the nature of the particular allegations, mitigating circumstances like the evolving legal standards, and the penalties imposed previously on other banks"
Shukry Bishara, Arab Bank's chief banking officer, called the OCC's most recent examination of the bank a "great disappointment", reflecting "the difficulty many banks have in complying fully with [anti-money laundering] standards that are often confusing and constantly evolving".
Arab Bank said the fine was excessive "given the nature of the particular allegations, mitigating circumstances like the evolving legal standards, and the penalties imposed previously on other banks".
The bank has about $27 billion in assets and operates in 30 countries.
An OCC spokesman declined to comment on the details of the Arab Bank case or to state how many transactions were at issue. A FinCEN spokesman was not available to comment.
The Bank Secrecy Act, adopted in 1970, was intended to stop US banks and financial service providers from being used as intermediaries or to hide the movement of money derived from criminal activity, such as narcotics dealings.
The act gained greater significance after the 11 September 2001 attacks on the US.
Banks are required to file reports of suspicious financial transactions to FinCEN, or risk fines and sanctions.
But financial institutions have long complained about enforcement of anti-money laundering rules, saying regulations are confusing and that bank examiners inconsistently apply standards.
The US Treasury's Office of Foreign Assets Control says the US has frozen about $150 million in what it terms terrorist-related funds and blocked the financial transactions of about 400 people since 9/11.
"It is vitally important that banks have effective anti-money laundering programs in place to ensure that the financial system is not used to facilitate terrorism or criminal activity"
comptroller of the currency
Riggs Bank in January agreed to a $16 million criminal fine for violating the act, on top of the civil fine. PNC Financial Services Group Inc acquired Riggs' parent, Riggs National Corp in May.
Arab Bank, the largest bank operating in the Palestinian territories, has been sued several times on behalf of relatives of US citizens killed or injured in Middle East violence, who have accused the bank of helping move money to families of bombers.
The bank denies involvement in such transfers, and has said it has made extensive investments to promote peace by financing projects in Palestinian territories.
The Arab Bank is a key financer of cultural programmes and scholarships in several Arab countries through the Abd al-Hamid Shuman Organisation - named after the bank's founder.
The organisation is also regarded as one of the leading intellectual and cultural organisations and publishing houses in the Arab world.