Adnan Abu Hasna, a Gaza-based spokesman for the United Nations Relief and Works Agency (UNRWA), said Netanyahu was pursuing a "fantasy".
The United States, Israel's main ally, was the biggest donor to UNRWA last year, pledging $368 million (288.78 million pounds), Reuters quoted the spokesman as saying.
Israeli Prime Minister Benjamin Netanyahu called on Sunday for the dismantling of the UN agency that aids millions of Palestinian refugees, accusing it of anti-Israeli incitement and saying he had conveyed his message to the US ambassador to the United Nations, Nikki Haley.
"It is time UNRWA be dismantled and merged with the United Nations High Commissioner for Refugees," he said.
UNRWA was established by the UN General Assembly in 1949 after hundreds of thousands of Palestinians fled or were expelled from their homes in the 1948 war that followed Israeli regime's creation.
It says it currently aids five million registered Palestinian refugees in the Middle East.
Also Chris Gunness, UNRWA's chief spokesman, said in an email to Reuters that only the General Assembly, by a majority vote, could change the agency's mandate.
"In December 2016, UNRWA's mandate was extended for three years by the General Assembly by a large majority," he added.
Most settlement units
Israel has so far this year advanced its highest number of settlement projects since 1992, the defense minister, Avigdor Lieberman, said Sunday, as Israeli settlements are illegal under international law, AFP reported.
The European Union on Friday censured the Israeli regime for giving the green light to plans for the construction of thousands of more settler units across the occupied West Bank.
“Israel’s continued policy of settlement expansion is illegal under international law,” said Federica Mogherini, the EU’s high representative for foreign affairs and security policy, in a statement on Friday.
Last week alone, Israel advanced plans for more than 3,000 settlement homes.
The move is a blatant violation of the United Nations Security Council’s Resolution 2334, which demands that Israel “immediately and completely cease all settlement activities in the occupied Palestinian territory, including East Jerusalem (Beit-ul-Moqaddas)”.
The resolution, adopted last year, also states that the building of settlements by Israel has “no legal validity and constitutes a flagrant violation under international law.”
Some 600,000 Israeli settlers now live in the West Bank and East Beit-ul-Moqaddas, alongside around 4.9 million Palestinians.
Netanyahu has said he still supports a two-state solution, but peace advocates say his actions show otherwise.