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US envoy to the United Nations Nikki Haley has said the body must lower its count for Palestinian refugees if Washington is to increase its funding to the UN Relief and Works Agency (UNRWA).

Speaking at the pro-Israel Foundation for Defense of Democracies, a Washington think tank, Haley agreed with a questioner who said the UNRWA figure of Palestinian refugees has been inflated.

The figure the body gives, of 5 million, are mostly of descendents of Palestinian refugees during the 1948 creation of Israel living in the occupied territories and neighbouring countries.

"We will be a donor if it (UNRWA) reforms what it does ... if they actually change the number of refugees to an accurate account, we will look back at partnering them," Haley said. 

Her comments follow huge cuts by the US to the UNRWA budget, which leaders in Ramallah believe is an attempt to force Palestinians to capitulate to Israel's demands.

She said that the right to return, a key demand of Palestinians for any future peace deal with Israel, should also be addressed.

"I do agree with that [right to return being off the table], and I think we have to look at this in terms of what’s happening (with refugees) in Syria, what's happening in Venezuela," she said.

"So I absolutely think we have to look at the right of return."

Palestinians are furious over a decision by the US to move its embassy to Jerusalem, a move that effectively recognises Israel's illegal claims to the contested city.

President Donald Trump is preparing to unveil a peace deal he will put forward to Palestinians. 

Ramallah believes the peace deal will back Israel's claims to the illegally occupied West Bank territories.

Agencies contributed to this story.