Annual funds exceeding $60m (£46m) for the Palestinian security services has now come to an end.
It is believed that co-operation with occupying Israeli forces, which helps keep relative calm in the West Bank, could now be disrupted.
The Anti-Terrorism Clarification Act (ATCA), which was passed by Congress and then signed into law by President Donald Trump in 2018 has recently come into effect.
The new law allows Americans to sue those receiving foreign aid from the U.S. in domestic courts over alleged complicity in “acts of war”.
At a news conference last Thursday, senior official Saeb Erekat said the Palestinian Authority (PA) had sent a letter to the U.S. state department requesting from them to terminate funding because they feared lawsuits.
He said: “We do not want to receive any money if it will cause us to appear before the courts.”
The PA has denied Israeli accusations that it incites “terrorist” attacks.
Mr Erekat added: “We are not seeking anything, the Americans have made their decision, but we will continue to participate in the fight against terrorism in the region.”
He highlighted that that there were ongoing cases against three banks operating in the occupied Palestinian territories before American courts, and that previously, numerous attempts to allow U.S. victims of Palestinian attacks to sue the PA and the Palestine Liberation Organisation (PLO) had been unsuccessful due to a lack of jurisdiction.
The PA has said that the stop of U.S. aid will not affect the work of its security forces.
AN American official told the BBC last Friday: “At the request of the Palestinian Authority, we have wound down certain projects and programmes funded with assistance under the authorities specified in ATCA in the West Bank and Gaza.
“All USAID assistance in the West Bank and Gaza has ceased.”
The duration of the halt remain unclear.
However, the Palestinian official said no practical steps were being taken to stop the USAID mission in the occupied Palestinian territories.
In 2018, the U.S. cut hundreds of millions of dollars of aid to the Palestinians, which included funding for humanitarian projects that were supported by ISAID, such as infrastructure education and health.
This was generally understood as pressuring Palestinian officials to restart “peace talks” with Israel and to work with Washington in light of its promised Middle East peace plan.
President Donald Trump’s administration also halted all American funding for the UN agency for Palestinian refugees, UNRWA.
The U.S. had given more than $360m (£280m) in 2017, making it the largest single donor to UNRWA.
American government scholarships granted to Palestinian students have also been suspended and hundreds of Palestinian workers on US-funded programmes have lost their jobs.