(CNN) The UN agency tasked with assisting Palestinian refugees says the Trump administration's decision to cut funds to the organization has sparked its largest-ever financial crisis.

The decision drew condemnation from Palestinians, praise from Israel, and expressions of deep concern from UN officials and refugee groups. It came two weeks after US President Donald Trump raised the prospect of cutting US aid to Palestinians in a series of tweets.

The United Nations Relief and Works Agency (UNRWA) will launch a global fundraising campaign to fill in budget gaps left behind by the US administration's decision to withhold $65 million, roughly half of the amount it was due to receive from the US this month.

"It's the most serious financial crisis in UNRWA's 70-year history," said UNRWA spokesman Christopher Gunness.

"It's a massive, massive task that we face," Gunness told CNN. "There is a huge deficit that we need to fill."

The US is UNRWA's single largest donor -- it donated $368 million to the agency in 2016 alone. The US says it is cutting the agency's funding because it wants to see reforms and for other countries to contribute more.

Alexander De Croo, Belgium's deputy prime minister, announced Wednesday the country will distribute $23 million to UNRWA to cover a portion of the funding withheld by the United States. The contribution covers about 35% of what the US withheld.

Who is affected?

More than 5 million registered Palestinian refugees benefit from UNRWA's educational, health and social services. The agency's operations span the West Bank, Gaza, Jordan, Syria and Lebanon. It educates about 500,000 children in nearly 700 schools and UNRWA doctors see more than 9 million patients in nearly 150 primary health clinics every year.

UN Secretary General Antonio Guterres said he was "very concerned" about the impact of the US decision to cut UNRWA's funding.

"First of all, UNRWA is not a Palestinian institution, it is a UN institution," he said at a UN press conference Tuesday.

The services provided by UNRWA "are of extreme importance, not only for the well-being of this population, and there is a serious humanitarian concern here," he said. "But also in my opinion and the opinion that is shared by most international observers, including some Israeli ones, it is an important factor of stability."

Palestinian camps around the region typically suffer from rampant poverty, overcrowding, high unemployment, poor housing conditions and lack of infrastructure, according to UNRWA.

Many of the refugees are descendants of those displaced from what was then known as Palestine in the Arab-Israeli war of 1948-49. After the war, the newly created state of Israel prevented them from returning.

In some host nations, such as Lebanon, Palestinian refugees cannot claim the same rights as other foreign workers because they are not formally citizens of another country, UNRWA says

Jordan and Lebanon are already under extreme strain from having to support refugees fleeing the Syrian conflict. Guterres said that if those countries also suddenly face the burden of having to deal with under-funded or non-funded medical clinics and other services, "this will create a very, very serious problem and we'll do everything we can to avoid this situation to occur."

There are also fears that the move could boost extremist groups in the region's 58 official Palestinian refugee camps.

"(The US) is creating a vacuum that will be exploited by groups who the US and others accuse of being affiliated with terrorism," said Riad Kahwaji, founder and CEO of the Institute for Near East and Gulf Military Analysis, a Dubai-based think tank.

Kahwaji warned that fundamentalists could step in to fill in gaps left behind if UNRWA's services are scaled back.

"The door is wide open to extremist groups that use charities to infiltrate the most impoverished societies, to start educating them on their own, implanting radical extremist ideas, and recruiting the unemployed who used to be employed by UNRWA," Kahwaji said.

Why now?

The move appears to be part of the fallout from Trump's controversial decision to recognize Jerusalem as the capital of Israel.

Two weeks ago, Trump threatened to cut off aid to Palestinian groups unless Palestinian leaders agree to resume negotiations to broker a peace deal with Israel. The tweets were apparently aimed at the Palestinian Authority, which condemned Trump's declaration of Jerusalem as the Israeli capital in a speech last month.

Palestinian Authority President Mahmoud Abbas said the US had "disqualified" itself as a broker in the Palestinian-Israeli peace process, and rallied the UN General Assembly to reject the move.

Weeks after the vote, US Ambassador to the UN Nikki Haley said Trump intended to freeze funding to the Palestinians until they "agree to come back to the negotiating table." She called the Palestinian push for the UN General Assembly vote on Trump's Jerusalem decision "not helpful to the situation."

But State Department spokeswoman Heather Nauert said the move had nothing to do with "punishing" the Palestinians for their refusal to enter into negotiations with Israel, or the UN vote.

"This is not aimed at punishing anyone," Nauert said Tuesday, as she announced the US decision to release $60 million in funding for the agency, while indefinitely withholding another $65 million.

Palestinian school children leave UN-run Ramallah Elementary School at Beirut's Shatila refugee camp.

Nauert said the funds were being withheld because the US would like to see reforms at UNRWA, and added that Washington would also like to see other countries contribute more to the UN agency. She said that the US would like to see "revisions made in how UNRWA operates" so that "people can get the services -- whether it's school or the healthcare services that they need."

Asked whether the US had signaled any desire for reform to the UN agency, UNRWA spokesperson Christopher Gunness said: "The US government has consistently commended UNRWA's high impact, transparency and accountability."

He said that in the latest meetings UNRWA chief Pierre Krähenbühl held in Washington last November, "every senior US official he met expressed respect for UNRWA's role and for the robustness of its management."

Will the Palestinian Authority be affected?

The separate financial backing provided by the US for the Palestinian Authority, which governs enclaves of self-rule in the West Bank, has not been affected by the Trump administration's announcement.

Analysts say that the Palestinian governing body has so far been spared any funding cuts, but legislation that threatens to cut assistance to the PA is making its way through Congress.

The Taylor Force Act, which would prohibit assistance to the PA unless it stops paying stipends to families of people accused of terrorism, enjoys considerable support in the House and Senate.

Abbas at a press conference in Paris in December

"Congress is going to do the administration's work for it. So, there's really no need right now for the administration to impose any additional restrictions on aid to the Palestinian Authority," said Aaron David Miller, vice president for new initiatives at the Woodrow Wilson Center.

"The Trump administration decided to take out its frustrations on a very vulnerable, very weak target," said Miller. "You punish the Palestinians for refusing to engage in a peace process which is arguably comatose and you punish the Palestinians who need the education and the health benefits and they have nothing to do with that peace process."