The United States says it will suspend direct aid to the Palestinian government now led by Hamas.
The new Hamas-led government took office last month
But the US will boost humanitarian aid to Palestinians through UN aid agencies, a spokesman said.
The US statement came the same day the European Union announced it was suspending direct aid payments to the Palestinian government.
The US and the EU want Hamas to recognise Israel, renounce violence and accept past peace agreements.
State Department spokesman Sean McCormack, reading a statement from Secretary of State Condoleezza Rice, said the US was "suspending assistance to the Palestinian government, cabinet and ministries".
The decision came because "the new Hamas-led Palestinian government failed to accept the Quartet principles of non-violence, recognition of Israel and respect of previous agreements between the parties", he said.
Mr McCormack said the suspension would be lifted if the Palestinian government met the Quartet's terms. The Quartet comprises the United Nations, the US, the EU and Russia.
The State Department said that the programmes which would be suspended or cancelled were worth over $400m (£229.5m), although some of the funding would be redirected into humanitarian aid to the Palestinians.
This humanitarian aid, via agencies not linked to the government, would go up by 57% this year to $245m (£140.5m), he said, and another $42m would go to supporting civil society and independent institutions.
"The desire is to help provide for the basic humanitarian needs of the Palestinian people," he said.
The BBC's Jonathan Beale says the move, which comes as no surprise, is clearly designed to turn up the pressure on Hamas.
On Wednesday, Palestinian Prime Minister Ismail Haniya told the first meeting of his Hamas-led cabinet that the government faced a deep financial crisis.
He said his administration had inherited a finance ministry that had no money left, yet had mounting debts.
The US and the EU, the major donors to the Palestinians, have been reviewing their aid policy since Hamas won the general elections in January.
Between them, they contributed about $1bn (£574m) to the Palestinian Authority in 2005.