JERUSALEM (Reuters) - Palestinian refugees reacted with dismay on Saturday to a United States decision to halt funding to a U.N. agency, warning that it would lead to more poverty, anger and instability in the Middle East.

The U.S. announcement on Friday that it will no longer support the United Nations Relief and Works Agency for Palestine Refugees (UNRWA) has deepened a cash crisis at the agency, and heightened tensions with the Palestinian leadership.

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The 68-year-old UNRWA provides services to about 5 million Palestinian refugees across Jordan, Lebanon, Syria and the West Bank and Gaza. Most are descendants of the roughly 700,000 Palestinians who were driven out of their homes or fled the fighting in the 1948 war that led to Israel’s creation.

In Gaza, Nashat Abu El-Oun, a refugee and father of eight, said: “The situation is bad and it will become worse...People can hardly afford living these days and if they became unable to earn their living they will begin thinking of unlawful things.”

State Department spokeswoman Heather Nauert said on Friday that UNRWA’s business model and fiscal practices were an “irredeemably flawed operation” and that the agency’s “endlessly and exponentially expanding community of entitled beneficiaries is simply unsustainable.”

UNRWA rejected the criticisms, with spokesman Chris Gunness describing it as “a force for regional stability.”

Speaking in Jordan, where more than 2 million registered Palestinian refugees live, including 370,000 in ten refugee camps, Gunness said: “It is a deeply regrettable decision...some of the most disadvantaged, marginalized and vulnerable people on this planet are likely to suffer.”

Gunness said UNRWA provides health clinics, schooling for 526,000 refugee children across Jordan, Syria, Lebanon, Gaza and the West Bank, including East Jerusalem, and food assistance to 1.7 million people - a million of them in Gaza.

The agency, which has a funding gap of $217 million, will now ask donors for more and seek new sources of income, he said.

BIGGEST DONOR

The United States, by far UNRWA’s biggest donor, slashed funding earlier this year, paying out only $60 million of a first installment in January, and withholding $65 million. It had promised $365 million for the whole year.

Washington said the agency needed to make unspecified reforms and called on the Palestinians to renew peace talks with Israel.

The last Palestinian-Israeli peace talks collapsed in 2014, partly because of Israel’s opposition to an attempted unity pact between the Fatah and Hamas Palestinian factions and to Israeli settlement building on occupied land that Palestinians seek for a state.

Israeli Intelligence Minister Israel Katz said the U.S.’s decision represented a “realistic view of the situation and supports Israel’s position.”

UNRWA is “the body that enshrines the Palestinian refugee problem,” he wrote on Twitter.

Earlier this year Israeli Prime Minister Benjamin Netanyahu urged action against UNRWA.

“We already have great-great-grandchildren of refugees who are not refugees,” he said in January. “I suggest a gradual conversion of all funds going to UNRWA to other agencies.”

On Friday, before the U.S. decision was confirmed, the head of the international U.N. refugee agency UNHCR, Filippo Grandi, was asked if his agency could assume UNRWA’s role. “The Palestinian refugees in the region are the responsibility of UNRWA,” he said, making no further comment.

The UNRWA move is the latest in a number of actions by the Trump administration that have alienated the Palestinians, including the recognition of Jerusalem as Israel’s capital and moving the U.S. Embassy from Tel Aviv to Jerusalem.

That move was a reversal of longtime U.S. policy and led Palestinian leadership to boycott the Washington peace efforts led by Jared Kushner, Trump’s senior adviser and son-in-law.

Palestinian chief negotiator Saeb Erekat accused Washington of implementing the agenda of “Israeli extremists who have done nothing but to destroy the prospect of peace.”

Speaking in Ramallah, he said: “The United States may have the right to say that we don’t want to give taxpayers’ money, but who gave the U.S. the right to approve the stealing of my land, my future, my aspirations, my capital, my Aqsa Mosque, my Holy Sepulchre Church?”

In Jalazone refugee camp near Ramallah in the Israeli-occupied West Bank, Ayoub Abeidi, whose family once lived in what is now the city of Lod in Israel, said the decision was political.

“Trump wants to finish off UNRWA so he can terminate the right of refugees (to return),” said Abeidi, 53. “Our right to return exists and neither Trump nor anybody else can cancel it.”

Successive Israeli government have ruled out any right of return, fearing the country would lose its Jewish majority.

WASHINGTON/RAMALLAH (Reuters) - The United States on Friday halted all funding to a U.N. agency that helps Palestinian refugees in a decision further heightening tensions between the Palestinian leadership and the Trump administration.

A spokesman for Palestinian President Mahmoud Abbas denounced the decision as “a flagrant assault against the Palestinian people and a defiance of U.N. resolutions.”

State Department spokeswoman Heather Nauert said the business model and fiscal practices of the United Nations Relief and Works Agency (UNRWA) made it an “irredeemably flawed operation.”

“The administration has carefully reviewed the issue and determined that the United States will not make additional contributions to UNRWA,” she said in a statement.

Nauert said the agency’s “endlessly and exponentially expanding community of entitled beneficiaries is simply unsustainable and has been in crisis mode for many years.”

The latest announcement comes a week after the administration said it would redirect $200 million in Palestinian economic support funds for programs in the West Bank and Gaza.

UNRWA spokesman Chris Gunness voiced the agency’s “deep regret and disappointment” at the decision, which he said was surprising given that a December U.S. funding agreement had acknowledged UNRWA’s successful management.

“We reject in the strongest possible terms the criticism that UNRWA’s schools, health centers, and emergency assistance programs are ‘irredeemably flawed,’” Gunness added in a series of Twitter posts.

The 68-year-old agency says it provides services to about 5 million Palestinian refugees in Jordan, Lebanon, Syria and the West Bank and Gaza. Most are descendants of people who were driven out of their homes or fled the fighting in the 1948 war that led to Israel’s creation.

U.S. President Donald Trump and his aides say they want to improve the Palestinians’ plight, as well as start negotiations on an Israeli-Palestinian peace agreement.

But under Trump, Washington has taken a number of actions that have alienated the Palestinians, including the recognition of Jerusalem as Israel’s capital. That move was a reversal of longtime U.S. policy and led the Palestinian leadership to boycott the Washington peace efforts being led by Jared Kushner, Trump’s senior adviser and son-in-law.

The United States paid out $60 million to UNRWA in January, withholding another $65 million, from a promised $365 million for the year.

“NOT PART OF THE SOLUTION”

“Such a punishment will not succeed to change the fact that the United States no longer has a role in the region and that it is not a part of the solution,” Abbas spokesman Nabil Abu Rdainah told Reuters.

He said “neither the United States nor anybody else will be able to dissolve” UNRWA.

In Gaza, the Islamist group Hamas condemned the U.S move as a “grave escalation against the Palestinian people.”

“The American decision aims to wipe out the right of return and is a grave U.S escalation against the Palestinian people,” said Hamas spokesman Sami Abu Zuhri.

He told Reuters the “U.S leadership has become an enemy of our people and of our nation and we will not surrender before such unjust decisions.”

Earlier on Friday, German Foreign Minister Heiko Maas said Germany would increase its contributions to UNRWA because the funding crisis was fueling uncertainty. “The loss of this organization could unleash an uncontrollable chain reaction,” Maas said.

UNRWA has faced a cash crisis since the United States, long its biggest donor, slashed funding earlier this year, saying the agency needed to make unspecified reforms and calling on the Palestinians to renew peace talks with Israel.

The last Palestinian-Israeli peace talks collapsed in 2014, partly because of Israel’s opposition to an attempted unity pact between the Fatah and Hamas Palestinian factions and Israeli settlement building on occupied land that Palestinians seek for a state.

Nauert said the United States would intensify talks with the United Nations, the region’s governments and international stakeholders that could involve bilateral U.S. assistance for Palestinian children.

“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,” she said.

Gunness told Reuters earlier in August that UNRWA’s support would be needed as long as the parties failed to reach an agreement to end the crisis.

“UNRWA does not perpetuate the conflict, the conflict perpetuates UNRWA,” he said. “It is the failure of the political parties to resolve the refugee situation which perpetuates the continued existence of UNRWA.”

WASHINGTON (Reuters) - The U.S. military said it has made a final decision to cancel $300 million in aid to Pakistan that had been suspended over Islamabad’s perceived failure to take decisive action against militants, in a new blow to deteriorating ties.

The so-called Coalition Support Funds were part of a broader suspension in aid to Pakistan announced by President Donald Trump at the start of the year, when he accused Pakistan of rewarding past assistance with “nothing but lies & deceit.”

The Trump administration says Islamabad is granting safe haven to insurgents who are waging a 17-year-old war in neighboring Afghanistan, a charge Pakistan denies.

But U.S. officials had held out the possibility that Pakistan could win back that support if it changed its behavior.

U.S. Defense Secretary Jim Mattis, in particular, had an opportunity to authorize $300 million in CSF funds through this summer - if he saw concrete Pakistani actions to go after insurgents. Mattis chose not to, a U.S. official told Reuters.

“Due to a lack of Pakistani decisive actions in support of the South Asia Strategy the remaining $300 (million) was reprogrammed,” Pentagon spokesman Lieutenant Colonel Kone Faulkner said.

Faulkner said the Pentagon aimed to spend the $300 million on “other urgent priorities” if approved by Congress. He said another $500 million in CSF was stripped by Congress from Pakistan earlier this year, to bring the total withheld to $800 million.

The disclosure came ahead of an expected visit by U.S. Secretary of State Mike Pompeo and the top U.S. military officer, General Joseph Dunford, to Islamabad. Mattis told reporters on Tuesday that combating militants would be a “primary part of the discussion.”

Experts on the Afghan conflict, America’s longest war, argue that militant safe havens in Pakistan have allowed Taliban-linked insurgents in Afghanistan a place to plot deadly strikes and regroup after ground offensives.

INCREASING PRESSURE

The Pentagon’s decision showed that the United States, which has sought to change Pakistani behavior, is still increasing pressure on Pakistan’s security apparatus.

It also underscored that Islamabad has yet to deliver the kind of change sought by Washington.

“It is a calibrated, incremental ratcheting up of pressure on Pakistan,” said Sameer Lalwani, co-director of the South Asia program at the Stimson Center think tank in Washington.

Reuters reported in August that the Trump administration has quietly started cutting scores of Pakistani officers from coveted training and educational programs that have been a hallmark of bilateral military relations for more than a decade.

The Pentagon made similar determinations on CSF in the past but this year’s move could get more attention from Islamabad, and its new prime minister, Imran Khan, at a time when its economy is struggling.

Pakistan’s foreign exchange reserves have plummeted over the past year and it will soon decide on whether to seek a bailout from the International Monetary Fund (IMF) or friendly nations such as China.

“They are squeezing them when they know that they’re vulnerable and it is probably a signal about what to expect should Pakistan come to the IMF for a loan,” Lalwani said. The United States has the largest share of votes at the IMF.

Khan, who once suggested he might order the shooting down of U.S. drones if they entered Pakistani airspace, has opposed the United States’ open-ended presence in Afghanistan. In his victory speech, he said he wanted “mutually beneficial” relations with Washington.

A Pakistani official, speaking on the condition of anonymity, said he was unaware of a formal notification of the U.S. decision on assistance but said one was expected by the end of September.

Pakistan has received more than $33 billion in U.S. assistance since 2002, including more than $14 billion in CSF, a U.S. Defense Department program to reimburse allies that have incurred costs in supporting counter-insurgency operations.

Pakistan could again be eligible next year for CSF.