A Palestinian official said any aid shortage could see the situation "explode".
Bo Schack, Gaza director of the UN's body for refugees, admitted there was concern crises in Yemen, Syria and elsewhere in the Middle East meant donors have less money to spend.
Negotiations between Palestinian factions over a unity government have stumbled, while Israel has maintained a blockade on Gaza, leaving some governments to question whether funding for Palestinians is well spent.
Others have diverted parts of their aid budgets to focus on the refugee crisis in Europe.
"It is true there is serious competition. It is true there are issues with the (Palestinian) negotiations and the lack of developments," Schack said, during an appeal for $571 million for Palestinians in Gaza, east Jerusalem and the West Bank in 2016.
"(But) what I see from the donor community is the commitment and the importance of dealing with the situation remains as strong as ever."
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He warned of the threat of another funding crisis like last year, where the agency nearly didn't open its schools for Palestinian refugees in Gaza, the West Bank, Jordan and Lebanon.
Dana Erekat, an official with the Palestinian finance and planning ministry, said a funding shortage could lead to more turmoil.
"Development funding has decreased, budget support has also decreased," she said.
"If we do not address the needs of these communities the situation will explode in the way it has in the rest of the region.
"This is precisely why donor support at this time is very, very critical."
The appeal aims to ease a growing humanitarian crisis in Gaza in particular, where nearly half of the population has insufficient access to healthy food.
David Carden, head of office at the United Nations Office for the Coordination of Humanitarian Affairs, said they had reduced the appeal from $705 million in 2015 -- about half of which was met.
"The fact that the overall figure has been reduced from the previous year gives us hope that donors will take it seriously and that they will believe what we have included is an accurate reflection of what the needs are," he said.