Money earmarked for Palestinians in West Bank and Gaza will instead be redirected to programmes within Israel’s borders.
The decision announced on Friday was linked to a January 31 deadline set by new US legislation under which foreign aid recipients would be more exposed to anti-terrorism lawsuits.
The deadline also sees the end of about $60m in US aid for the Palestinian security forces, whose cooperation with Israeli forces helps maintain relative quiet in the West Bank.
Congress’s Anti-Terrorism Clarification Act (ATCA) empowers Americans to sue foreign aid recipients in US courts over alleged complicity in “acts of war”.
The Palestinian Authority declined further US funding over worries about its potential legal exposure, although it denies Israeli accusations that it encourages armed attacks.
“At the request of the Palestinian Authority, we have wound down certain projects and programmes funded with assistance under the authorities specified in ATCA in the West Bank and Gaza,” a US official told Reuters on Friday.
“All USAID assistance in the West Bank and Gaza has ceased.”
It was unclear how long the cessation would be in effect.
The official said no steps were currently being taken to close the USAID mission in the Palestinian territories, and no decision had been made about future staffing at the USAID mission in the US Embassy in Jerusalem.
USAID is the main agency administering US foreign assistance in the Palestinian territories.
According to its website, the agency spent $268m on public projects in the West Bank and Gaza as well as Palestinian private sector debt repayment in 2017, but there were significant cuts to all new funding through the end of June 2018.
Nabil Abu Rudeineh, a spokesman for Palestinian President Mahmoud Abbas, said: “The suspension of aid to our people, which included critical sectors such as health and education, will have a negative impact on all, create a negative atmosphere, and increase instability.”
The Palestinian Authority is an interim self-government body set up following the 1993 Oslo peace accords. The peace process, aimed at finding a two-state solution to the Israeli-Palestinian conflict, has been stalled since 2014.
In Gaza, Hamas spokesman Ismail Rudwan condemned the stopping of aid, deploring what he called “politicised money”.
The USAID announcement comes after humanitarian officials in the West Bank and Gaza said they were facing a general cutback in funding from donors worldwide.
Last year, Washington cut hundreds of millions of dollars of aid to the Palestinians, which included funding to humanitarian groups supported by USAID.
The US cuts were widely seen as a means of pressuring the Palestinian leadership to resume peace talks with Israel and to engage with the Trump administration in the run-up to its long-awaited Middle East peace plan.
As a result, dozens of NGO employees have been laid off, health and unemployment programmes have been shut down, and infrastructure projects halted.
In August, Washington announced an end to all US funding for the UN agency that assists Palestinian refugees. The agency received $364m from the US in 2017.
In January, the World Food Programme cut food aid to about tens of thousands of Palestinians due to a shortage of funds.
Diplomatic sources said Palestinian, US and Israeli officials were trying to find ways to keep the money flowing to Abbas’s security forces.
“We will find a solution to these things. I won’t get into details,” Israeli security cabinet minister Yuval Steinitz told Israel Radio on Thursday.
USAID will continue to implement conflict management and mitigation grants in Israel, with Jewish and Arab participants, the official said.