Jerusalem's mayor has said he plans to remove a UN agency for Palestinian refugees from the city, accusing the body of operating illegally and promoting incitement against Israel.

Nir Barkat said on Thursday schools, clinics and sports centres, among other services operated by UNRWA in occupied East Jerusalem, will be transferred to Israeli authorities.

The municipality did not provide an exact timeline but it said schools serving 1,800 students would be closed by the end of the current school year, the AP news agency reported.

Barkat, who is set to step down following municipal elections at the end of the month, said the US decision at the end of August to cut $300 million in aid to the agency prompted the move.

Seen by the Palestinians and most of the international community as providing a valuable safety net, the European Union has called on Washington to reconsider its ending of funding to UNRWA.

"The US decision has created a rare opportunity to replace UNRWA's services with services of the Jerusalem municipality," Barkat said in a statement, claiming the schools and clinics were illegal and operate without an Israeli license.

"We are putting an end to the lie of the 'Palestinian refugee problem' and the attempts at creating a false sovereignty within a sovereignty."

Jerusalem's municipality said the move was coordinated with the Israeli government.

UNRWA did not immediately respond to a request for comment, AP said.

Founded in 1948, UNWRA was established to deal with the mass displacement of approximately 700,000 Palestinians, following the establishment of the state of Israel, to Jordan, Lebanon and Egypt.

Since then, the descendants of those Palestinians who continue to be displaced have benefited from several UNRWA initiatives, including educational facilities.

'Political attack'

Last month, Israeli news outlet Channel Two reported that the Trump administration wanted to redefine the status of the agency, as well as the definition of Palestinian refugees, with the ultimate aim of eventually closing down the agency.

Officials familiar with the decision told the Washington Post that the new definition would exclude the descendants of those originally displaced, reducing the current five million figure to fewer than a tenth of that number.

Palestinian groups continue to demand the right of return for refugees and their descendents who were displaced since 1948.

In the absence of a solution, the UN General Assembly has repeatedly renewed UNRWA's mandate.

Israeli Prime Minister Benjamin Netanyahu has said UNRWA should be abolished and its responsibilities taken over by the main UN refugee agency.

Last month, UNRWA spokesman Chris Gunness said the US funding cuts were a "political attack" on the Palestinian people and the agency, but that only the UN could change the status of refugees and UNWRA's mandate.

"You cannot airbrush out of history 5.4 million people who belong to a UN-protected community, you cannot wish away their rights, their right to education, their rights to health and their rights to self determination," he said.