Krahenbuhl said on Tuesday the US plan to reduce funding for the United Nations Relief and Works Agency (UNRWA) this year "has a political dimension that I think should be avoided."
"There is no doubt that if no solution is found to the shortfall... It is clear that if that is not bridged, then there will be increased instability," Krahenbuhl said.
"Cutting and reducing funding to UNRWA is not good for regional stability," he added.
On January 16, the US State Department announced that Washington would hold back 65 million dollars to UNRWA - more than half its planned contribution this year - and demanded that the agency make unspecified reforms.
In a tweet on January 2, US President Donald Trump said Washington gave the Palestinians hundreds of millions of dollars a year, but got “no appreciation or respect.”
Speaking at the World Economic Forum in Davos, Switzerland, last week, Trump also criticized the Palestinian leadership for what he called disrespecting Vice President Mike Pence during his visit to the region and suggested such behavior provided grounds for cutting aid.
"We give them hundreds of millions," Trump added. "That money is not going to them unless they sit down and negotiate peace."
The UNRWA chief's comments came as he issued an emergency appeal for more than 800 million dollars in funds to provide additional assistance to Palestinian refugees in Syria, the Gaza Strip and the West Bank.
Krahenbuhl said the US decision was clearly in connection with an announcement by Palestinian officials to cut all communications with the administration of US President Donald Trump after his controversial recognition of al-Quds as the capital of the Israeli regime.
He emphasized that the United States could no longer be the main mediator in talks with Israel.
On December 6, the US president announced his decision to recognize Jerusalem al-Quds as Israel’s capital and relocate the US embassy in Israel from Tel Aviv to Jerusalem al-Quds.
The United Nations General Assembly on December 21 overwhelmingly voted in favor of a resolution that calls on the US to withdraw its controversial recognition of Jerusalem al-Quds as the Israeli capital.
The UN official further said it is always imperative for every humanitarian agency "to preserve and ensure that humanitarian funding is preserved from politicization."
"It is very important that humanitarian funding not be caught up in political considerations," he said.
He added, "The whole point of supporting communities in very difficult conflict environments is that one doesn't have to agree with anyone's leadership. One is concerned with the well-being ... of communities."
Krahenbuhl noted that UNRWA provides vital services to some 5.3 million Palestinian refugees across Jordan, Lebanon, Syria, West Bank and the Gaza Strip and runs 700 schools and 140 health clinics.
He said the agency is facing the "most serious financial crisis" in its long and proud history, warning that cuts to any services for people who are "often already in dire need and lacking any possibilities to move or to improve their situations" could lead to disaster.
Thousands of the United Nations employees on Monday staged a mass strike in the besieged Gaza Strip over US plans to cut annual aid to the UNRWA.
Some 13,000 employees went on a one-day strike, closing schools, clinics and food distribution centers in the Gaza Strip in protest at the US administration’s decision.
UNRWA spokesman Chris Gunness on January 17 censured the United States over its “regrettable” decision to cut funding for the body and said it “dramatically reduced contribution results in the most severe funding crisis in the history of the agency.”
Gunness added, “The US has announced it will contribute $60 million to the program budget. There is for the moment no other indication of possible funding.”