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Palestinian leaders say they will not be "blackmailed" after Donald Trump threatened to cut aid worth more than $300million annually.

The December 6 announcement concerning the disputed city led Palestinian president Mahmud Abbas to say the United States could no longer play any role in the Middle East peace process.

Trump on Tuesday publicly questioned why the United States should provide the Palestinians with aid payments when they are "no longer willing to talk peace" with Israel.

The remark was widely condemned by the Palestinian side, which is angry at the United States over Trump's decision to recognize Jerusalem as the capital of Israel.

"President Trump has sabotaged our search for peace, freedom and justice".

In a tweet, the president dismissed Palestinian fury over his recognition of Jerusalem as Israel's capital, saying he had planned for Israel "to pay" in future negotiations for his declaration.

But I think fellow palestinian propagandist Hanan Ashrawi takes the cake with her response.

Nikki Haley, U.S. ambassador to the United Nations, said Tuesday the United States will stop contributing to a U.N. agency that gives humanitarian aid to Palestinians.

"We're trying to move for a peace process, but if that doesn't happen, the president is not going to continue to fund that situation", Haley emphasized, without clarifying whether the term "situation" referred specifically to UNRWA's operations.

Trump recently took Israel's side by formally declaring Jerusalem their capital.

Palestinian President Mahmoud Abbas has previously stated Palestine would only agree to peace if Israel agreed to a two-state solution with East Jerusalem as the capital for a future Palestinian state.

He has heaped pressure on Palestinians to do a deal, threatening to close the de facto "embassy" in Washington in addition to recognising Israel's contested claim on Jerusalem and now threatening aid.

UNRWA, which receives around $300 million annually from the USA, for years has been the lifeline to hundreds of thousands of Palestinian refugees living in the West Bank and the Gaza Strip.

On Sunday, the PA said it was recalling its envoy to the United States for consultations, in protest of USA actions.

Trump has said his decision merely recognized the reality that Jerusalem already serves as Israel's capital and wasn't meant to prejudge the final borders of the city.