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Palestinian officials said Monday that the U.S. has suspended West Bank development projects worth tens of millions of dollars after Congress froze funding to dissuade the Palestinians from seeking U.N. recognition of an independent state.

It's the first concrete sign of repercussions for the Palestinians' decision to defy Washington on the issue.

Hassan Abu Libdeh, the Palestinian economics minister, said he was informed Monday by officials of USAID, the U.S. government's foreign aid agency, that two projects _ worth $55 million and $26 million _ were being put on hold for lack of funding. One supported the development of the Palestinian private sector and the other aimed to improve the investment environment, Abu Libdeh said, adding that 50 people involved were laid off last week and 200 others would follow by November. Other ministries also reported USAID projects were in jeopardy, including an $85 million five-year plan to improve Palestinian health services.

USAID officials confirmed some programs were affected by the Congressional hold, but would not give details. "Ongoing programs will continue until funds are exhausted," said one official, who spoke on condition of anonymity because he was not authorized to discuss the matter with the media.

Palestinian officials denounced the move as counterproductive to Mideast peace efforts and said this would not deter them from seeking full U.N. membership for a state of Palestine in the West Bank, Gaza and east Jerusalem _ lands Israel captured in 1967.

Two Republican-led committees in the House _ Foreign Affairs and the Appropriations subcommittee on the State Department and Foreign Operations _ put a hold on $200 million in economic assistance in late August, as the Palestinians were gearing up for their U.N. move.

Palestinian President Mahmoud Abbas last month proceeded anyway, presenting his case for recognition in a speech to the U.N. and formally submitting a request to the Security Council.

The Obama Administration finds itself caught in the middle _ opposing both the Palestinians' U.N. gambit and the Republican moves to punish them for it.

Keeping the aid flowing "is not only in the interest of the Palestinians, it's in the U.S. interest and it's also in the Israeli interest, and we would like to see it go forward," State Department Spokeswoman Victoria Nuland said Monday.

Visiting U.S. Defense Secretary Leon Panetta argued on Monday that "this is no time to withhold those funds, at a point in time where we are urging the Palestinians and the Israelis to sit down and negotiate a peace agreement."

The U.S. argues that a Palestinian state can only arise through negotiations with Israel and says it will veto the Palestinian membership application in the Security Council if the measure gains enough support. The U.S. _ along with other world mediators _ has called for a quick resumption of long-stalled Israeli-Palestinian negotiations, but the Palestinians say Israel must first halt all settlement building on occupied land.

"We feel very sorry about this decision by the American Congress, which we think came to sabotage our ability to establish a Palestinian state," Abu Libdeh said. "This is a political measure that reflects a blind bias against the Palestinian interests and will not help the efforts of the U.S. administration to resume negotiations. ... The decision (by Congress) is affecting all aspects of American support for the Palestinian people."

Donor countries have given billions of dollars to the Palestinians over the years, in an attempt to prop up the Abbas government and an economy battered by conflict with Israel and continued Israeli restrictions on trade and movement.

The Palestinians have received about $500 million a year from the U.S. alone in recent years, including tens of millions of dollars for training the Palestinian security services. The partial suspension of aid by Congress mainly affects development and infrastructure programs being supervised by USAID but not the support for the security services.

Israeli government officials declined comment Monday on the partial suspension of U.S. aid. However, Israeli Prime Minister Benjamin Netanyahu, while staunchly opposed to Abbas' decision to seek U.N. recognition, has not rushed to retaliate.

Despite the increasingly heated rhetoric, the two sides continue to cooperate on a practical level.

Palestinian security forces work with their Israeli counterparts in keeping Islamic militants in the West Bank in check, while Israel every month transfers to the Palestinians tens of millions of dollars it collects on their behalf in taxes and other payments.

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Associated Press writers Karin Laub in Ramallah and Donna Cassata and Matthew Lee in Washington contributed to this report.

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