The US is to transfer an additional $150m (£93m) in aid to the Palestinian Authority and called on other donor nations to increase aid.
US Secretary of State Hillary Clinton made the announcement in a video call with Palestinian PM Salam Fayyad.Ms Clinton said that despite deadlock, a "positive outcome" was still possible in the Middle East peace talks.
But Israel's plan for more settlement building in the West Bank was counterproductive, she added.
The funding was described as an effort to shore up the Palestinian Authority's budget.
The announcement came after Israel said it planned to build more than 1,300 new homes for Jewish settlers in East Jerusalem.
The US has rejected Israeli claims the new homes would not affect the peace process.
Mrs Clinton is to meet Israeli Prime Minister Benjamin in New York on Thursday, and is expected to raise the issue of the settlements.
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