US President Donald Trump's cut of more than $200 million in aid for Gaza and the West Bank is the latest in a series of steps Palestinian leaders say aims to “liquidate” their cause.

The move follows Trump's recognition in December of the disputed city of Jerusalem as Israel's capital as well as his freezing of $300 million in annual funding for the United Nations agency for Palestinian refugees (UNRWA).

Washington's new policy on Jerusalem overturned decades of precedent and prompted the Palestinian leadership to break off relations with the White House.

The US president responded by threatening to withhold aid until they returned to the negotiating table, and Friday's announcement of the cut appeared to be in line with his stance.

For many Israelis, the changes made by Washington are long overdue and bring years of failed peace efforts closer in line with reality.

But Palestinian leaders argue the White House is playing into the hands of Israeli politicians.

Speaking in June, when the US aid was merely frozen instead of cut, longtime Palestinian chief negotiator Saeb Erekat spoke of the need to “defeat the American-Israeli scheme to liquidate the Palestinian cause”.

He and other Palestinian leaders reacted furiously to Friday's announcement, with one calling it “cheap blackmail” to coerce them into accepting terms of the peace plan that the White House has promised to unveil.

“America is now sharing in the dreams and the policies of Israel's right-wing government,” said Palestinian political analyst Jihad Harb.

'More than absurd'

But for Kobi Michael, formerly in charge of Palestinian issues at Israel's strategic affairs ministry, Trump's approach serves as a necessary rude awakening for the Palestinian leadership.

He cited Palestinians' refusal to accept Jerusalem as Israel's capital, coupled with the UN's method of classifying Palestinian refugees, as “characteristics which are much more than absurd in the eyes of the majority of the Israelis”.

Explore: Jerusalem — city of prayer and conflict

The aid cut adds to the financial woes of the Palestinian Authority, whose $5 billion budget for this year includes a $1.2 billion deficit. Foreign aid was put at $775 million.

Humanitarian conditions in the Israeli-blockaded Gaza Strip, which is run by the Hamas movement, are also badly deteriorating.

Just last month, the World Bank announced it was increasing its annual allocation to the Palestinians to $90 million from $55 million “in response to an increasingly difficult situation”.

The US funding that was cut was for humanitarian programmes, infrastructure and budget support in the occupied West Bank.

It also included assistance for humanitarian programmes, such as health care, in the Gaza Strip.

The White House has maintained some $61 million in assistance this year for the Palestinian security forces, which coordinate with their Israeli counterparts.

Capping refugees?

The Trump administration is taking on core questions of the Israeli-Palestinian conflict, with Jerusalem's status being the most controversial of them all.

The Palestinians see east Jerusalem as the capital of their future state and almost the entire international community takes the position that the issue must be negotiated between the two sides.

After the dramatic reduction in funding, refugees' rights are now reportedly in Washington's crosshairs.

Also read: Trump’s Palestine plan

Some 750,000 Palestinians fled or were expelled during the 1948 war surrounding Israel's creation.

Those still alive today along with their descendants are classified as refugees, amounting to a total of five million people who are eligible for services provided by UNRWA.

Palestinians and rights groups say the agency provides vital assistance — including schooling for hundreds of thousands of students — that otherwise may not be available.

But Israel argues UNRWA's means of operation perpetuates the refugee problem.

It also insists on the Palestinian leadership giving up its demand that refugees be granted the right to return to their former lands now inside Israel.

On Saturday, Israeli television reported the US now wanted to cap the number of Palestinians classified as refugees to 500,000.

A US embassy official did not confirm the report.