Israeli Prime Minister Benjamin Netanyahu called on Sunday for the dismantling of the UN agency that aids millions of Palestinian refugees, accusing it of anti-Israeli incitement and saying he had conveyed his message to the U.S. ambassador to the United Nations.

Adnan Abu Hasna, a Gaza-based spokesman for the United Nations Relief and Works Agency (UNRWA), said Netanyahu was pursuing a "fantasy."

In public remarks to his cabinet at its weekly meeting, Netanyahu said UNRWA perpetuated, rather than solved, the Palestinian refugee problem and that anti-Israeli incitement was rife in its institutions, which includes schools.

"It is time UNRWA be dismantled and merged with the United Nations High Commissioner for Refugees," Netanyahu said.

Referring to a meeting he held in Jerusalem on Wednesday with Nikki Haley, the U.S. ambassador to the UN, Netanyahu said: "I told her it was time the United Nations re-examine UNRWA's existence." The United States, Israel's main ally, was the biggest donor to UNRWA last year, pledging $368 million.

Netanyahu made his comments two days after UNRWA said it had discovered part of a tunnel running under two of its schools in a refugee camp in the Gaza Strip.

U.S. Ambassador to the United Nations Nikki Haley stands next to Danny Danon, Israel's permanent representative to the United Nations, as she tours what Israel says is a terror tunnel built by Hamas, near Israel's border with the Gaza Strip, in a picture taken on June 8, 2017. (Matty Stern/U.S. Embassy Tel Aviv/Reuters)

UNRWA was established by the UN General Assembly in 1949 after hundreds of thousands of Palestinians fled or were expelled from their homes in the 1948 war that followed Israel's creation.

It says it currently aids five million registered Palestinian refugees in the Middle East.

Chris Gunness, UNRWA's chief spokesman, said in an email to Reuters that only the General Assembly, by a majority vote, could change the agency's mandate.

"In December 2016, UNRWA's mandate was extended for three years by the General Assembly by a large majority," he added.

UNRWA said it had protested to Hamas, the Islamist group that rules the enclave and which had used a network of cross-border tunnels to launch attacks inside Israel in a 2014 war. UNRWA condemned the tunnel as a violation of neutrality. Hamas denied it was responsible for building it.

Abu Hasna, speaking in Hebrew on Israel Radio, cautioned that if "UNRWA is gone" in the Gaza Strip, where its food, educational and health services are crucial, "two million people will turn into IS [Islamic State] supporters.