Citing "three Western diplomats", Israeli Channel Ten diplomatic correspondent Barak Ravid reported the freeze on Friday at Axios.
Israel's military said it targeted four Hamas posts in the Gaza Strip on Thursday after mortar rounds from the Palestinian enclave were fired toward a nearby army position. IS claims Hamas' attempts "to disband Islamic law" enabled the U.S.to make such a decision.
The $125 million in question amounts to about a third of Washington's annual donations to the agency. The U.S. Congress is close to passing the Taylor Force Act, which would cut off Palestinian aid money unless the practice is stopped.
But they can create a bloody mess on Israel's border, creating problems for the Jewish state and throwing the peace process even more into doubt. "There are still deliberations taking place, and we have until mid January to decide what we are going to do".
Hamas doesn't recognize the legitimacy of Israel, and its charter called for Israel's total destruction until 2017, when it was revised to allow for acceptance of a Palestinian state in the West Bank and Gaza Strip.
The two groups are also at odds over the role of Iran and the Lebanese Shiite group Hezbollah in the conflict between Israel and the Palestinians.
Palestinian negotiator Saeb Erekat Trump is "threatening to starve Palestinian children in refugee camps and deny their natural rights to health and education if we don't endorse his terms and dictations".
Israeli Prime Minister Benjamin Netanyahu reiterated support for U.S. plans to cut funds for United Nations refugees agency UNRWA.
Privately, however, Netanyahu urged Trump not to enact the cuts, according to the Times of Israel.
According to local sources from Palestine, the Israeli forces have abducted over 750 Palestinian citizens during raids in houses in the West Bank, in the past one month.
Israeli media said Saturday that Netanyahu "supports a gradual reduction of funding to UNRWA".
While both groups are designated as terrorist organizations by the United States and Israel, IS sees Hamas as a nationalist movement that does not adhere to the strict interpretation of Islam.