Washington (CNN) The United States is ending all funding to the United Nations agency tasked with supporting Palestinian refugees, the US State Department said Friday, describing the body as "irredeemably flawed."

The United States has long been the biggest single donor to the United Nations Relief and Works Agency for Palestine Refugees in the Near East, known as UNRWA, donating more than $350 million to the agency in 2017.

The agency offers educational, health and social services across the West Bank, Gaza, Jordan, Syria and Lebanon to more than 5 million registered Palestinian refugees. It educates about 500,000 children in nearly 700 schools and its doctors see more than 9 million patients in nearly 150 primary health clinics every year.

Palestinian children walk outside the Askar refugee camp, near Nablus in the West Bank, in January 2018.

In January this year, the United States said it would withhold $65 million , from an initial installment of $125 million it was expected to hand over to UNRWA at the start of the year. The US said it wanted UNRWA to reform and believed other countries should increase the amounts they contributed to the agency.

"When we made a US contribution of $60 million in January, we made it clear that the United States was no longer willing to shoulder the very disproportionate share of the burden of UNRWA's costs that we had assumed for many years," State Department spokeswoman Heather Nauert said in a statement Friday.

"Several countries, including Jordan, Egypt, Sweden, Qatar, and the UAE have shown leadership in addressing this problem, but the overall international response has not been sufficient."

Nauert criticized the agency's business model and fiscal practices as "unsustainable" and having been in "crisis mode" for many years.

"The United States will no longer commit further funding to this irredeemably flawed operation," she said. "We are very mindful of and deeply concerned regarding the impact upon innocent Palestinians, especially school children, of the failure of UNRWA and key members of the regional and international donor community to reform and reset the UNRWA way of doing business."

Chris Gunness, spokesman for UNRWA, voiced "deep regret" over the US decision and pushed back against its criticism of UNRWA's work.

"We reject in the strongest possible terms the criticism that UNRWA's schools, health centers, and emergency assistance programs are 'irredeemably flawed,'" he said.

"These very programs have a proven track record in creating one of the most successful human development processes and results in the Middle East. The international state community, our donors and host countries have consistently praised UNRWA for its achievements and standards."

Foreign Policy first reported the Trump administration's decision to end funding for the UN agency, which was established by the UN General Assembly in 1949.

A senior administration official told CNN the decision was made at a meeting between Jared Kushner, US President Donald Trump's son-in-law and a White House senior adviser, and Secretary of State Mike Pompeo, but that US Ambassador to the UN Nikki Haley had also been pushing for the move.

The Trump administration will also call for a large reduction in the number of Palestinians considered to be refugees, the administration official and a regional diplomat briefed on the decision told CNN.

The White House did not immediately return a request for comment on the decision.

A senior administration official criticized the agency in a statement to CNN earlier this month, saying that it "has perpetuated and exacerbated the refugee crisis and must be changed so the Palestinian people can reach their full potential."

The statement followed a Foreign Policy report in early August that revealed leaked emails in which Kushner pressed fellow officials to engage in "an honest and sincere effort to disrupt UNRWA."

'Right of return'

Removal of Palestinians' refugee status would effectively mean they would lose the "right of return" to homes that are now in Israel and reclaim lost property -- a move that would have enormous significance for the approximately 5.3 million Palestinian refugees registered with UNRWA.

During the Arab-Israeli War of 1948/49, which followed the establishment of the State of Israel, about 700,000 Palestinians were expelled from or fled their homes, a period the Palestinians call "Nakba," meaning catastrophe.

Most Palestinians consider the right of return to be an inalienable right of the Palestinian people. It has long been considered what is called a "final status" issue in peace talks, an acknowledgment that it is among the toughest areas for Israelis and Palestinians to reach agreement.

This would be the second final status issue that the US President has sought to take off the table, the first being Jerusalem.

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For decades, US policy was to avoid declaring Jerusalem the capital of Israel in the absence of an Israeli-Palestinian peace deal, as the Palestinians also claim Jerusalem as their capital and its final status was supposed to be left to negotiations. But Trump upended that policy in December when he recognized Jerusalem as Israel's capital

Anat Berko, an Israeli lawmaker with the governing Likud party, told CNN she supported the US move on UNRWA and said she hoped other countries would follow suit.

"An end to UNRWA will bring an end to the 'refugee forever' status. We cannot solve any conflict with this definition of refugees. Humanitarian aid -- yes. But UNRWA -- no," Berko said.

Al-Awda, a Florida-based NGO that advocates for the right of return, talks of the "fundamental, inalienable, historical, legal, individual and collective rights of all Palestinian refugees to return to their original towns, villages and lands anywhere in Palestine from which they were expelled."

Israeli media outlets have reported concerns in some quarters that serious cuts to UNRWA's budget could exacerbate tensions on the ground in the Palestinian territories and, by impacting the provision of basic public services, strengthen the hand of the Palestinian militant group Hamas in Gaza.

US orders cut in West Bank, Gaza aid

News that the Trump administration will end all funding to UNRWA comes on the heels of Trump ordering the United States to cut $200 million in aid to Palestinians.

CNN reported last week that the President directed the State Department to withdraw $200 million in aid that was originally planned for programs in the West Bank and Gaza, according to a senior State Department official.

Nauert told reporters Tuesday that a review ordered by Trump earlier this year of US assistance to the Palestinians had established that that money "is not in the best interests of the US national interest and also at this time does not provide value to the US taxpayer."

Ahmad Shami, a spokesman for Palestinian Authority Prime Minister Rami Hamdallah, accused the Trump administration in a statement earlier this week of seeking to strip millions of Palestinians of their refugee status on top of cutting aid funds.

"After using humanitarian aid to blackmail and pressure the Palestinian leadership to submit to the empty plan known as 'the deal of the century,' the Trump administration plans to commit an immoral scandal against Palestinian refugees by giving itself the right to abolish the historical rights of Palestinian refugees without any legitimacy," he said.

"This is a clear looting of our humanity leading to more chaos in the region."

Shami called on the international community to "stop the gambling schema of Trump and Netanyahu to endorse colonization, apartheid, and denial of Palestinian fundamental rights."

Israeli Prime Minister Benjamin Netanyahu has frequently said the work done by UNRWA should be picked up by the UN's main refugee agency, the UNHCR.

Netanyahu told foreign journalists in January: "The perpetuation of the dream of bringing the descendants of refugees back to Jaffa is what sustains this conflict. UNRWA is part of the problem, not part of the solution."

Jaffa was one of the largest Arab towns in British Mandate Palestine that would become part of Israel in 1948.

But Gunness told CNN that the UN agency fundamentally rejected Netanyahu's criticism.

"It is not UNRWA that perpetuates the conflict, it is the conflict that perpetuates UNRWA; it is the failure of the political parties through negotiations to produce an overall peace agreement and thereby resolve the refugee crisis," said Gunness. "That is what makes UNRWA's existence necessary."

UNRWA schools open

Pierre Krähenbühl, Commissioner-General of UNRWA, said this week that the agency's 711 schools in Syria, Jordan, Lebanon, Gaza and the West Bank, including East Jerusalem, were opening on time for their 526,000 students despite its current "unprecedented" $217 million deficit.

"For decades, donors have recognized that UNRWA is a force multiplier for stability in one of the most the volatile regions around the world," he wrote in an op-ed on the UNRWA website

Krähenbühl noted the "regrettable" decision by the Trump administration early this year to cut its planned funding to UNRWA, but also paid tribute to the "strong solidarity" shown by the broader international community whose increased or new donations had gone some way to filling the gap.

The German government pledged Friday to increase significantly its funding to UNRWA, Reuters news agency reported, adding that German Foreign Minister Heiko Maas had made clear that other nations would also need to step in to meet the existing shortfall.

The United States in 2016 agreed to a new 10-year military aid package for Israel worth $38 billion over 10 years, according to congressional and administration sources. That was an increase on an approximately $30 billion decade-long deal that expires this year.