Palestinian Authority President Mahmoud Abbas called the decision from the Trump administration an attempt to put pressure on Palestinian authorities.
For almost 70 years, the agency offered registered Palestinian refugees in the occupied territories, Lebanon, Jordan and Syria access to education, health care and social services in addition to providing support to purchase food.
What did the U.S. do?
The US is the largest single donor to Unrwa, providing $368m in 2016 and funding nearly 30 percent of its operations in the region.
In January, the USA announced it would withhold more than half of a tranche of funding for the agency.
Yesterday, Washington, which until previous year was by far the agency's biggest contributor announced it was ending funding to the "irredeemably flawed operation".
Aaron David Miller, a former USA negotiator in Mideast peace talks, warned on Twitter that the cuts could lead to instability, and end up costing Israel.
"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 global donor community to reform and reset the UNRWA way of doing business", she added.
In her statement, Nauert said that the UNWRA's business model and fundamental practices were "unsustainable". Israel's Channel 2 news also reported that the administration will remove the Palestinian refugees' "right of return" from the negotiating table.
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.
"By endorsing the most extreme Israeli narrative on all issues including the rights of more than five million Palestinian refugees, the USA administration has lost its status as peacemaker and is damaging not only an already volatile situation, but the prospects for future peace in the Middle East", Zomlot said in a statement.
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He has previously tweeted that the U.S. has not received "appreciation or respect" for the aid it has provided, and that the Palestinians are unwilling to negotiate with Israel.
He said "neither the United States nor else will be able to dissolve" UNRWA.
The agency expressed "deep regret and disappointment" at the decision and strongly rejected the Trump administration's criticism of its operations.
"We made it clear that the United States was no longer willing to shoulder the very disproportionate share of the burden of UNRWA's costs that we had assumed for many years", Nauert said in the statement.
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Palestinian officials have also condemned the move.
"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.
They have reportedly said that serious cuts to UNRWA's budget would create a vacuum in the provision of basic services in the Strip, where the majority of residents are dependent on the organization.
At least 170 Palestinians have been killed since the border demonstrations began, drawing censure against Israel from a number of world powers except the United States, which has echoed its Middle East ally in blaming Hamas for the bloodshed.
The move overturned decades of USA neutrality on the issue and attracted worldwide criticism.