The Washington Post On Sunday reported that the US Agency for International Development (USAID) gave $2 million to the Palestinian Authority (PA) to boost its image before the polls.
The paper said the assistance was intended to counter Islamic resistance group Hamas, which the US considers a terrorist organisation.
Fatah is the de facto governing party of the PA and faces a formidable challenge from Hamas, which is participating in legislative elections for the first time.
Azmi Nibali, campaign manager of the leftist Freedom and Social Justice list, headed by Ahmad Majdalani, told Aljazeera.net that electoral law was being breached.
"This is a clear violation of the election law," he said. "Receiving money from foreign sources is forbidden and the PA and Fatah ought to clarify their position in this regard.
"If it is OK for the PA to receive money from the US or any other foreign entity, then it should make the money available to all Palestinian factions and candidates without favouring anybody."
Nibali said that "receiving money from the US carries a certain price and has serious ramifications, and we shall raise this issue before Palestinian courts".
Majdalani, a former PA minister, condemned "this brazen foreign interference in the Palestinian elections".
Not without a price
"Nobody funds somebody's election campaign without a price," he said during a press conference in Ram Allah on Monday. "And we know what the price will be - it will be in the form of political concessions and acting at America's beck and call."
He demanded that all political factions and candidates should show transparency regarding the financing of their respective election campaigns.
Hamas also denounced the funding, calling it an "American bribe" to Fatah and saying it should give the Palestinian people another reason to vote for "those whose hands are not tainted with American money".
Nayif Rajub, a Hamas candidate in the southern West Bank, said: "I want to ask the Palestinian people. Do you trust those who run their campaign with American grants and American assistance?
"Will you give your votes to those who work according to the American agenda?"
PA and Fatah officials refused to answer questions.
A US consulate official in Jerusalem told Aljazeera on Monday that the money was being spent to help the "democratic process" in the occupied Palestinian territories.
Another official, James Bever, the USAID mission director for the West Bank and Gaza Strip, was quoted as saying that "we are here to support the democratic process, but we don't support parties that are on the terrorism list".