The aid was part of the State Department's Economic Support and Development Fund allocations planned for West Bank and Gaza programs in the 2017 fiscal year, totalling around $230 million, a State Department official said in a Wall Street Journal report.
At least $200 million had been set aside for basic humanitarian services such as health care, education, and wastewater projects, and the remaining $30 million is still under review, the official said.
"The United States also provides substantial support to help the Palestinian Authority provide law enforcement and maintain the rule of law," the consulate's website states.
The money will be redirected to "high-priority projects elsewhere," the State Department official said.
The funding for Palestinians, which comes out of a pot of about $5 billion in aid for countries believed to be at risk or rebuilding, is "critical to advancing the United States' longstanding national security priority of achieving Israeli-Palestinian peace," an administration budget report said.
Palestinian Liberation Organization Executive Committee member Hanan Ashrawi spoke out against the decision.
"The U.S. administration is demonstrating the use of cheap blackmail as a political tool. The Palestinian people and leadership will not be intimidated and will not succumb to coercion. The rights of the Palestinian people are not for sale," Ashrawi told CNN. "There is no glory in constantly bullying and punishing a people under occupation."
"The U.S. administration has already demonstrated meanness of spirit in its collusion with the Israeli occupation and its theft of land and resources; now it is exercising economic meanness by punishing the Palestinian victims of this occupation," Ashrawi added.
Since January, the money had been frozen because Trump ordered a review to make sure it was being spent in the U.S. national interest.
Trump warned then on Twitter that the funding may be in jeopardy.
"But with the Palestinians no longer willing to talk peace, why should we make any of these massive future payments to them?" Trump questioned in the post.
The freeze has created a shortfall in funding for United Nations Relief and Works Agency-run schools, with humanitarian officials saying the U.S.-Palestinian leadership feud could lead to crisis.
"With the unemployment rate in Gaza close to 50 percent cuts to our program and Unrwa (United Nations Relief and Works Agency) will not only suspend basic services, but also has the potential to severely worsen the unemployment crisis," Andy Dwonch, Mercy Corps' Palestine Mission director, told the Wall Street Journal.