The US will give a United Nations agency $60m in aid for Palestinians but will withhold another $65m “for future consideration.”

US President Donald Trump had threatened in a tweet to cut millions in contributions in order to force Palestinian National Authority President Mahmoud Abbas into coming to the negotiating table to hash out a peace deal with Israel.

"It is time other countries, some of them quite wealthy, step in and do their part to advance regional security and stability," an administration official told Reuters.

"This is not aimed at punishing" anyone, State Department spokeswoman Heather Nauert said of the cut.

The US has been the largest donor - responsible for nearly a third of the budget - to the UN Relief and Works Agency (UNRWA) which works to help Palestinians in the West Bank, Gaza Strip, Lebanon, Jordan, and Syria providing food, health-related, and education aid.

The agency has been repeatedly criticised by Israel for being biased and allowing its facilities to be used by Palestinian militants.

In 2016, the US contributed $335m to the relief agency and a similar sum was planned for 2018.

"There is a need to undertake a fundamental re-examination of UNRWA, both in the way it operates and the way it is funded," the same official said about any possible future funds.

In cutting the aid package, the administration appeared to be in line with Mr Trump's 2 January tweet in which he wrote that Palestinians were receiving "hundreds of millions of dollars" but gave the US "no appreciation or respect."

One of the sticking points in the peace process has been the control of Jerusalem and last month, the US President broke with 70 years of diplomatic procedures and announced the US would recognise the holy city as the capital of Israel.

US Ambassador to the UN Nikki Haley had actually advocated for cutting off funds going to UNRWA completely, echoing her sentiments that the world body had an anti-Israel bias.

She was talked down after Defence Secretary James Mattis and Secretary of State Rex Tillerson indicated that if the relief agency's efforts are severely hampered it could cause further unrest in Jordan, an ally which hosts several million Palestinian refugees.

Nikki Haley says U.S. will withhold funding for Palestinian refugees

The decision to provide the $60m will allow the agency to operate at a minimum.

Riots in the region had already broken out in the wake of Mr Trump's recognition of Jerusalem and cutting off all aid would likely have escalated the violence.

In a humiliating blow for Mr Trump on the world stage, the UN General Assembly had voted by 128 to nine to declare his controversial decision to recognise Jerusalem as Israel’s capital “null and void” on 21 December 2017.

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Just days after the US used its veto power at the UN Security Council to block a similar measure, the General Assembly resoundingly condemned the America’s unilateral action, which most observers said would hamper efforts to secure peace in the Middle East.

While the vote had little practical impact – it is not legally binding – it was a considerable embarrassment for the US as it reflected global opinion.

Ahead of the vote, the US’s ambassador to the UN, Nikki Haley, had warned that the US would would be “taking names” of any countries who supported a resolution criticising Washington’s actions.