Donald Trump has appeared to threaten to cut off US aid money to the Palestinian Authority.
The President asked why the US should make "any of these massive future payments" when the Palestinians are "no longer willing to talk peace".
Mr Trump, in a pair of tweets, said the US pays "the Palestinians HUNDRED OF MILLIONS OF DOLLARS a year and get no appreciation or respect."
"They don't even want to negotiate a long overdue ... peace treaty with Israel," he wrote.
Mr Trump infuriated Palestinians and Muslims across the Middle East when he announced late last year that the US would consider Jerusalem the capital of Israel and move its embassy there, upending decades of US policy and igniting protests.
While the Palestinians have not closed the door to a potential deal with Israel, Palestinian leader Mahmoud Abbas said the announcement had destroyed Mr Trump's credibility as a Mideast peace broker, calling the decision "a declaration of withdrawal from the role it has played in the peace process".
Tuesday's tweets mark a tacit admission by Mr Trump that his decision to move the US embassy in Israel from Tel Aviv to Jerusalem has thrown a spanner into his administration's plans to restart the peace process between Israelis and Palestinians, which he had dubbed "the ultimate deal".
Mr Trump tasked son-in-law Jared Kushner to restart the effort, and brought his former attorney, Jason Greenblatt, into the White House to lead the negotiations.
Mr Trump's Mideast peace team had held meetings with Israeli, Palestinian and Arab leaders for nearly a year ahead of an expected peace proposal.
But by recognising Israel's claim to Jerusalem, Mr Trump was seen by the Palestinians as siding with Israel on the most sensitive issue in the conflict. The Palestinians seek east Jerusalem - which Israel captured in 1967 - for their capital.
Mr Trump said his decision merely recognised the reality that Jerusalem already serves as Israel's capital and wasn't meant to prejudge the final borders of the city.
In his tweets, M Trump argued his decision had taken "Jerusalem, the toughest part of the negotiation, off the table, but Israel, for that, would have had to pay more".