Jerusalem (AFP) - The UN agency for Palestinian refugees on Friday expressed concern after Jerusalem's Israeli mayor said he would remove it from the city.

Mayor Nir Barkat announced in a statement Thursday a "detailed plan to remove UNRWA from Jerusalem and replace its services with municipal services".

UNRWA said such a move would affect its humanitarian operations and installations in Israeli-annexed east Jerusalem.

The agency runs schools and health centres particularly in the Shuafat refugee camp where it says 24,000 Palestinians are estimated to live.

UNRWA has come under pressure from Israel and the United States.

The two countries object to the fact that Palestinians can pass refugee status to their children, and want the number of refugees covered by the agency to be sharply reduced.

The US administration ending its funding to UNRWA in August, the latest in a series of controversial moves applauded by the Israeli government but criticised by the Palestinians and the international community.

"The US decision has created a rare opportunity to replace UNRWA's services with services of the Jerusalem Municipality," Barkat said.

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

The issue of Palestinian refugees -- along with the status of Jerusalem -- has long been a major sticking point in peace efforts.

More than 750,000 Palestinians fled or were expelled during the 1948 war surrounding Israel's creation.

They and their descendants are now classified as refugees who fall under UNRWA's mandate.

Palestinian leaders continue to call for at least some of them to be allowed to return to their former homes now inside Israel under any peace deal.

Israel says Palestinians must give up the so-called right of return and that allowing descendants of refugees to inherit their status only perpetuates the problem instead of solving it.

Israel also considers all of Jerusalem as its united capital, while the Palestinians see the predominantly Arab eastern area as the capital of their future state.

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Some five million registered Palestinians refugees are eligible for UNRWA services in the Israeli-occupied West Bank, the blockaded Gaza Strip, Jordan, Lebanon and Syria.

Barkat said that under his plan all UNRWA schools in east Jerusalem will be closed by the end of the current school year. Health centres will likewise be shut down.

The municipality will also lobby Israeli political leaders and press them to exercise their "authority to remove UNRWA (headquarters) from Israel's sovereign territory" in Jerusalem.

"In parallel, the city will work to expropriate the area for public purposes," he said.

But on Friday UNRWA said it was "determined to continue to carrying out" its services in east Jerusalem and criticised Barkat's plan.

"Such messaging challenges the core principles of impartial and independent humanitarian action and does not reflect the robust and structured dialogue and interaction that UNRWA and the State of Israel have traditionally maintained," the agency said.