"That money is on the table, and that money is not going to them unless they sit down and negotiate peace," Trump said of the hundreds of millions in U.S. aid for the Palestinians.
"Because I can tell you that Israel does want to make peace. And they're going to have to want to make peace, too, or we're going to have nothing to do with it any longer."
A State Department official confirmed that all U.S. aid to the Palestinians is under review, although nothing has been decided other than a previously announced $100 million cut to the United Nations agency that focuses on Palestinian needs. The U.N. Relief and Works Agency for Palestine Refugees in the Near East made up about half of the $700 million the United States donated last year, most of it for economic programs.
Sitting with Israeli Prime Minister Benjamin Netanyahu on the sidelines at the global economic forum here, Trump said that his decision last month to recognize Jerusalem as Israel's capital had removed a major obstacle to a deal. But, Trump said, Israel would "pay" for the concession in future negotiations.
Netanyahu shifted in his seat at that, but otherwise beamed as Trump said he "took Jerusalem off the table," and described an accelerated timetable for moving "a small version" of the U.S. Embassy from Tel Aviv to Jerusalem.
U.S. officials have said that the move will come by the end of next year, but Trump's wording made clear that the entire embassy, with its heavy security demands, will not move right away.
The Jerusalem move upended decades of U.S. policy that set the status of Jerusalem as undecided and a matter for mutual agreement by Israel and the Palestinians. Trump's willingness to withdraw funding for the Palestinians is also a departure from long-standing U.S. policy that sent millions to the Palestinian Authority and other agencies for schools, economic development projects and other support to Palestinians in the West Bank and elsewhere.
Past U.S.-sponsored peace efforts have focused at least in part on building up Palestinian government and economic institutions in preparation for statehood.
Trump said past efforts were too timid in using U.S. contributions as leverage. He also suggested past U.S. negotiators were also too hidebound in their view of Jerusalem.
"This was never brought up by other negotiators, but it's brought up by me. So I will say that the hardest subject they had to talk about was Jerusalem. We took Jerusalem off the table, so we don't have to talk about it anymore. They never got past Jerusalem. We took it off the table. We don't have to talk about it anymore. You won one point, and you'll give up some points later on in the negotiation, if it ever takes place. I don't know that it ever will take place," Trump said to Netanyahu.
Netanyahu responded, "This is a historic decision that will be forever etched in the hearts of our people for generations to come. People say that this pushes peace backward. I say it pushes peace forward because it recognizes history, it recognizes the present reality, and peace can only be built on the basis of truth."
The two leaders met on the sidelines of the World Economic Forum here, with an agenda that included future U.S. participation in the international nuclear deal with Iran. Netanyahu told Trump that he would back the United States if Washington walks away from the agreement that both leaders say is too weak.
Trump also met Thursday with British Prime Minister Theresa May, who broke with the U.S. leader over his retweet of far-right anti-Muslim videos. Trump took the opportunity to tell reporters that reported tension between them was just a "false rumor."
Trump was scathing in his criticism of Palestinian leaders, who have not spoken with any senior U.S. officials since Trump's Dec. 6 announcement about Jerusalem. Palestinians claim East Jerusalem as the capital of a future state. The area was annexed by Israel after the 1967 war with Arab states.
Trump has never been specific about whether he considers East Jerusalem to also be "off the table" in future negotiations, and he did not answer shouted questions about that point on Thursday. But his wording and his reference to future Israeli trade-offs suggest that he considers the city's status to be settled business at least for now.
Trump also said Palestinian leaders "disrespected" Vice President Pence by refusing to see him when he visited the Mideast this month.
"They have to respect the process also, and they have to respect the fact that the U.S. has given tremendous support to them over the years, in terms of monetary support and other support," Trump said.
"So we'll see what happens with the peace process, but respect has to be shown to the U.S. or we're just not going any further."
In response, Saeb Erekat, secretary general of the Palestine Liberation Organization, tweeted, "Those who say that Jerusalem is off the table are saying that peace is off the table."
The president's remarks here reflect a new low point for the Trump administration's relationship with the Palestinians, whose leaders Trump officials had courted last year in the early months of a peace effort led by Trump's son-in-law and adviser Jared Kushner.
Kushner, who attended the Netanyahu meeting along with Secretary of State Rex Tillerson and other U.S. officials, had been expected to begin presenting his plan as early as this spring.
Trump said a deal would be "a great achievement of mine" that he still hopes might happen.
His many critics and skeptics maintain that any slim chance of a Trump-driven deal died with the Jerusalem decision.
"Israel will pay for that," Trump said of the Jerusalem shift. "Look, Israel — something is going to happen. They'll do something that's going to be a very good thing. But they want to make peace, and I hope the Palestinians want to make peace. And if they do, everybody is going to be very happy in the end."
State Department spokeswoman Heather Nauert said the administration wants to break the logjam in peace talks that have accomplished little over many years.
"One of the things that we are doing is looking for ways to kind of shake things up a bit, try to get both sides to come back to the table," she told reporters Thursday. "And we look forward to try to facilitate any kind of peace talks."
In a speech at the U.N. Security Council on Thursday, U.S. Ambassador Nikki Haley harshly criticized the Palestinian leadership and, like Trump, appeared to write off the current leadership if they will not engage.
Haley had tough words for Mahmoud Abbas, head of the Palestinian Authority, for a Jan. 14 speech in which he declared the Oslo Peace Accords dead and said the U.S. recognition of Jerusalem as Israel's capital means the U.S. has no role in finding a resolution.
"A speech that indulges in outrageous and discredited conspiracy theories is not the speech of a person with the courage and the will to seek peace," Haley said.
Haley said the United States remains committed to helping Israel and the Palestinians resolve their conflict and is open to the possibility of a two-state solution, one for Jews and one for Arabs.
"But we will not chase after a Palestinian leadership that lacks what is needed to achieve peace," she said. "To get historic results, we need courageous leaders."
Carol Morello in Washington and Ruth Eglash in Jerusalem contributed to this story.