America has contributed almost 30% to UNRWA's total budget and the move means it will no longer get around $300m of support.
The US is stopping its funding for a UN organisation that helps Palestinian refugees, calling it an "irredeemably flawed operation".
America has contributed almost 30% to the total budget of the UN Relief and Works Agency (UNRWA).
The latest move means the agency will no longer get nearly $300m (£231m) of planned support.
The US state department attacked the "fundamental business model and fiscal practices" of the UNRWA, and the "endlessly and exponentially expanding community of entitled beneficiaries".
The agency expressed "deep regret and disappointment" at the decision and strongly rejected the Trump administration's criticism of its operations.
The move ends decades of US funding for the agency and comes a week after the country slashed bilateral aid for projects in the West Bank and Gaza despite international concerns over deteriorating humanitarian conditions there.
In 2016, the US donated $355m (£275m) to the UNRWA, which provides healthcare, 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 $60m (£45m) in funds but withheld a further $65m (£50m) it had been due to provide.
The US state department said: "When we made a US contribution of $60m 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.
"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 agency hit back, saying its "programmes have a proven track record in creating one of the most successful human development processes... in the Middle East".
Israeli Prime Minister Benjamin Netanyahu reportedly backs the US decision, with his office quoted as saying: "Israel supports the move because UNWRA is one of the main problems perpetuating the conflict."
America's decision comes as President Donald Trump and his Middle East advisers, Jared Kushner and Jason Greenblatt, are set to come up with a peace plan for Israel and the Palestinians.
And the humanitarian funding decision could lead to Palestinian suspicions that Washington is using it as leverage.
The Palestinian leadership has been hostile to any proposal from the Trump administration, claiming it is bias in favour of Israel.
