The Turnbull government is stopping its $10 million funding to the Palestinian government through the World Bank out of concern it might be freeing up other money to support convicted terrorists.
Instead, the money will be spent through a United Nations program to pay for health care, food, water, improved sanitation and shelter, Foreign Minister Julie Bishop said in a statement on Monday.
Australia's existing funding was going to the World Bank Multi-Donor Trust Fund, which supports the West Bank-based Palestinian Authority. Ms Bishop said she wrote to the Palestinian Authority asking for assurances that Australian money was "not being used to assist Palestinians convicted of politically motivated violence".
She said she was confident no money already given had been misused.
"However, I am concerned that in providing funds for this aspect of the PA’s operations there is an opportunity for it to use its own budget to activities that Australia would never support," she said.
"Any assistance provided by the Palestine Liberation Organisation to those convicted of politically motivated violence is an affront to Australian values, and undermines the prospect of meaningful peace between Israel and the Palestinians."
The money will be redirected to the United Nations Humanitarian Fund for the Palestinian Territories. Ms Bishop said this fund helped 1.9 million people, with about three quarters of the money to be spent in Gaza.
The United States' relationship with the Palestinian Authority has deteriorated lately, particularly after the Trump administration moved Washington's embassy from Tel Aviv to Jerusalem.
Palestinian President Mahmoud Abbas reportedly refused a meeting last week with senior White House adviser Jared Kushner, who is also US President Donald Trump’s son-in-law.