The United States is ending its decades of funding for the UN agency that helps Palestinian refugees, the State Department announced Friday, a week after slashing bilateral US aid for projects in the West Bank and Gaza.

The US supplies nearly 30 percent of the total budget of the UN Relief and Works Agency, or UNRWA, and had been demanding reforms in the way it is run.

The department said in a written statement that the United States “will no longer commit further funding to this irredeemably flawed operation.”

The decision cuts nearly $300 million of planned support.

UNRWA released a statement late Friday rejecting “in the strongest possible terms” the Trump administration's criticism of the agency and expressing “deep regret and disappointment.”

The US decision comes as President Donald Trump and his Middle East pointmen, Jared Kushner and Jason Greenblatt, prepare for the rollout of a much-vaunted but as yet unclear peace plan for Israel and the Palestinians, and it could intensify Palestinian suspicions that Washington is using the humanitarian funding as leverage.

The Palestinian leadership has been openly hostile to any proposal from the administration, citing what it says is a pro-Israel bias, notably after Trump recognised Jerusalem as Israel's capital in December and moved the US embassy there from Tel Aviv in May.

The Palestinian Authority broke off contact with the US after the Jerusalem announcement.

In 2016, the US donated $355 million to the UNRWA, which provides health care, education and social services to Palestinians in the West Bank, Gaza Strip, Jordan, Syria and Lebanon, and it was set to make a similar contribution this year.

In January the Trump administration released $60 million in funds but withheld a further $65 million it had been due to provide.

The remaining amount around $290 million had yet to be allocated.

“When we made a US contribution of $60 million in January, we made it clear that the United States was no longer willing to shoulder the very disproportionate share of the burden of UNRWA's costs that we had assumed for many years,” the statement said.

“Several countries, including Jordan, Egypt, Sweden, Qatar, and the UAE (United Arab Emirates) have shown leadership in addressing this problem, but the overall international response has not been sufficient.”

The statement criticised the “fundamental business model and fiscal practices” of UNRWA, and what the department characterised as the “endlessly and exponentially expanding community of entitled beneficiaries.”

UNRWA responded by stating that its “programs have a proven track record in creating one of the most successful human development processes ... in the Middle East.”

UNRWA added that it has been recognised by the World Bank “for running one of the most effective school systems in the region,” according to a statement released by the agency late Friday.

“This is a reflection of UNRWA's steadfast commitment to preserving dignity and opportunities,” the statement added.

A spokesman for UN Secretary General Antonio Guterres' office released a statement late Friday regretting the Trump administration's decision to cut UNRWA funding, saying the UN has appreciated years of US support for the agency.

“UNRWA has a strong record of providing high-quality education, health and other essential services, often in extremely difficult circumstances, to Palestine refugees who are in great need,” the statement added.

Hundreds of thousands of Palestinians fled or were forced from their homes during the war that led to Israel's establishment in 1948.

Today, there are an estimated 5 million refugees and their descendants, mostly scattered across the region a figure that has become a point of contention.

Palestinian leaders assert the right of those refugees to return to land now under Israeli control.

Last Friday, the State Department announced the US was cutting more than $200 million in bilateral aid to the Palestinians, following a review of the funding for projects in the West Bank and Gaza.

Palestinian President Mahmoud Abbas' spokesman called that US decision an attempt to force the Palestinians to abandon their claim to Jerusalem.

Speaking before the announcement on UNRWA, its representative in Washington, Elizabeth Campbell, said the withdrawal of US funding would leave the agency facing a financial crisis, but noted that Saudi Arabia, Qatar, the United Arab Emirates and others have provided more than $200 million in new funding to help cover its budget this year.

In recent days, senior Trump administration officials publicly expressed dissatisfaction with UNRWA but stopped short of saying the US would defund the agency.

On Tuesday, Nikki Haley, the US ambassador to the United Nations, complained that “Palestinians continue to bash America” although it's the main donor for UNRWA.

Speaking at the Foundation for Defence of Democracies think tank, Haley also said, “we have to look at right of return” of those classified as Palestinian refugees. She called on Middle East nations to increase aid.

There is deepening international concern over deteriorating humanitarian conditions in the West Bank and Gaza, and the US decision to defund provoked strong and polarised reactions in Washington.

Jeremy Ben-Ami, president of J Street, a liberal advocacy group, said Trump's decision “has the potential to harm millions of innocent civilians” and “will ratchet up the risk of greater destabilisation and conflict across the Middle East.”

But Richard Goldberg, senior adviser at the Foundation for Defence of Democracies, called it “a win for US taxpayers and peace” that would make Palestinians more self-sufficient and prepare them “for a true peace with Israel.”

The State Department statement said the US will intensify dialogue with the United Nations, host governments and international stakeholders about new models and new approaches to help Palestinians, especially schoolchildren, which may include direct bilateral assistance from the US and others.