The US is withholding more than half of the $125m (£90m) it gives to the UN relief agency for the Palestinians, American officials say.
It will provide $60 million in aid to the UN Relief and Works Agency but will hold back a further $65 million “for future consideration”.
President Donald Trump said earlier the US could cut aid if Palestinians rejected peace efforts with Israel.
The US funds almost 30% of the UN agency’s work overall.
In 2016, the second-largest donor, the EU, gave less than half as much as the US.
On Sunday, Palestinian President Mahmoud Abbas sharply attacked Mr Trump’s Middle East peace efforts, saying he would not accept any peace plan from the US after it recognised Jerusalem last year as Israel’s capital.
He accused Israel of putting an end to the 1994 Oslo Accords, which began the peace process.