The US has officially shuttered its consulate in Jerusalem, downgrading the status of its main diplomatic mission to the Palestinians by folding it into the US embassy to Israel.

For decades, the consulate functioned as a de facto embassy to the Palestinians. Now, that outreach will be handled by a Palestinian affairs unit, under the command of the embassy.

The symbolic shift hands authority over US diplomatic channels with the West Bank and Gaza to ambassador David Friedman, a longtime supporter and fundraiser for the West Bank settler movement and fierce critic of the Palestinian leadership.

The announcement from the State Department came early Monday in Jerusalem, the merger effective that day.

'This decision was driven by our global efforts to increase the efficiency and effectiveness of our diplomatic engagements and operations,' State Department spokesperson Robert Palladino said in a statement. 'It does not signal a change of US policy on Jerusalem, the West Bank, or the Gaza Strip.'

When first announced by US Secretary Mike Pompeo in October, the move infuriated Palestinians, fueling their suspicions that the US was recognising Israeli control over east Jerusalem and the West Bank, territories that Palestinians seek for a future state.

Palestinian official Saeb Erekat called the move 'the final nail in the coffin' for the US role in peacemaking.

The downgrade is just the latest in a string of divisive decisions by the Trump administration that have backed Israel and alienated the Palestinians, who say they have lost faith in the US administration's role as a neutral arbiter in peace process.

Last year, the US recognised Jerusalem as Israel's capital and relocated its embassy there, upending US policy toward one of the most explosive issues of the Israeli-Palestinian conflict. The Palestinians in turn cut off most ties with the administration.

The administration also has slashed hundreds of millions of dollars in humanitarian aid to the Palestinians, including assistance to hospitals and peace-building programs. It has cut funding to the UN agency that provides aid to Palestinians classified as refugees. Last fall, it shut down the Palestinian diplomatic mission in Washington.

The Trump administration has cited the reluctance of Palestinian leaders to enter peace negotiations with Israel as the reason for such punitive measures, although the U.S. has yet to present its much-anticipated but still mysterious 'Deal of the Century' to resolve the Israeli-Palestinian conflict.

Trump's son-in-law, Jared Kushner, announced last month that the U.S. would unveil the deal after Israeli elections in April. The Palestinian Authority has preemptively rejected the plan, accusing the US of bias toward Israel.