The US is ending ties with Israel's science and technological institutions in the occupied West Bank, East Jerusalem and the Golan Heights, officials have said.
The decision sees the US return to a long-standing policy that had been reversed by the administration of Donald Trump.
The new version of the rules states that co-operation "in geographic areas which came under the administration of Israel after 1967 and which remain subject to final-status negotiations is inconsistent with US foreign policy”.
The move is a further sign that the Israel and its most important ally are increasingly at odds over rapidly advancing Israeli plans to build settlements on occupied Palestinian land.
Israeli Foreign Minister Eli Cohen expressed his objection to the decision on Sunday, having been briefed about it before the official release.
US Republican senator Ted Cruz issued scathing criticism of the decision from the Biden administration, describing it as anti-Semitic.
The decision was announced on Monday, the same day the Israeli government's Supreme Planning Council approved the construction of about 5,700 more homes for Israeli settlers in the occupied West Bank.
State Department spokesman Matthew Miller said Washington was "deeply troubled" by the decision.
"The expansion of settlements undermines the geographic viability of a two-state solution, exacerbates tensions and further harms trust between the two parties," a US National Security Council spokesman said.
Since returning to office in January, Israeli Prime Minister Benjamin Netanyahu's coalition has approved more than 7,000 new housing units, most of them deep in the West Bank.
Most countries consider West Bank settlements, built on land captured by Israel in the 1967 Arab-Israeli war, to be illegal. Their presence is one of the fundamental issues in the Palestinian-Israeli conflict.
