The US is pausing funding for the UN agency for Palestinians, UNRWA, over allegations of staff involvement in the 7 October Hamas attacks.
UNRWA says it has sacked several people and ordered an investigation into information supplied by Israel.
UN Secretary-General Antonio Guterres said he was “horrified by this news” and has called for a swift investigation.
Hamas killed 1,300 people, mostly civilians, in the unprecedented attack.
Another 250 people were taken hostage. The events triggered Israel’s retaliatory attacks on Hamas in Gaza, which have killed more than 26,000 Palestinians, according to the territory’s Hamas-run health ministry.
Announcing its decision to temporarily halt funding, the US state department said it was “extremely troubled” by the allegations of UN staff involvement in the attacks.
The head of UNRWA, Philippe Lazzarini said, on Friday that Israel had provided his organisation “with information about the alleged involvement of several UNRWA employees in the horrific attacks on Israel on October 7”.
He said UNRWA had placed a number of employees under investigation and severed ties with them.
An adviser to the Israeli prime minister told the BBC that the 7 October Hamas attacks had involved “people who are on their [UNRWA] salaries”.
Mark Regev said there was information showing teachers working in UNRWA schools had “openly celebrated” the 7 October attacks.
He also referred to an Israeli hostage who, on her release, said she had been “held in the house of someone who worked for UNRWA”.
“They have a union which is controlled by Hamas and I think it’s high time that the UN investigated these links between UNRWA and Hamas,” he added.
UN chief Antonio Guterres said he had asked Mr Lazzarini to investigate “this matter swiftly”.
He added that the probe must make sure any UNRWA employee “shown to have participated or abetted” in the 7 October attack be sacked and referred for potential criminal prosecution.
Washington said it welcomed Mr Guterres’s call for a “thorough and swift investigation”.
The EU also said in a statement it was “extremely concerned” by the allegations and would assess further steps “based on the result of the full and comprehensive investigation”.
The US, Germany and the EU are among some of UNRWA’s biggest donors.
The agency provides education, healthcare and humanitarian aid to Palestinians in Gaza, the West Bank, Jordan, Syria and Lebanon.
However it says it is struggling to get humanitarian aid to many of the estimated 1.7m people – nearly three-quarters of the population – displaced by 12 weeks of fighting.
A number of UN facilities where Gazans had taken shelter have been hit in Israeli air strikes.
On Thursday, 12 people were killed when a UN shelter was struck in Khan Younis in southern Gaza.