US and Palestinian officials have criticised a freeze the US Congress has placed on $200m (£130m) US aid to the Palestinian Authority. US Defence Secretary Leon Panetta and a state department spokeswoman condemned the move as counterproductive. A senior Palestinian official said the move would affect vital services and was a \"great disappointment\". The freeze was imposed in response to a Palestinian application for UN membership as a fully fledged state. The partial aid suspension will mainly affect infrastructure and development programmes but will leave funding for training Palestinian security services intact. Over recent years, Palestinians have received about $500m annually from the US - making it the largest single country donor but second to the European Union overall. The aid freeze affects funding earmarked for the fiscal year 2011, which ended in September. The freeze has already halted two economic development projects, worth $55m and $26m, Palestinian economics minister Hassan Abu Libdeh told AP news agency - adding that 50 people had already been sacked with a further 200 to follow in November. Other ministries were quoted as saying other projects were in jeopardy, including an $85m five-year plan to improve Palestinian health services. But Mr Panetta told reporters the US administration \"opposes withholding those funds\". \"This is a critical time. This is no time to withhold those funds, at a point in time where we are urging the Palestinians and Israelis to sit down and negotiate a peace agreement,\" he said, speaking at a news conference in Israel on Monday. In Washington, state department spokeswoman Victoria Nuland said the withheld money \"goes to establishing and strengthening the institutions of a future Palestinian state, building a more democratic and stable and secure region\". \"We think it is money that is not only in the interests of the Palestinians, it\'s in US interests, and it\'s also in Israel\'s interest, and we would like to see it go forward,\" she said. The freeze was imposed by members of the US House Foreign Affairs Committee and the Senate Foreign Relations Committee in response to the Palestinian application for UN recognition as a state within 1967 borders. It currently has permanent observer entity status. The application, made by Palestinian leader Mahmoud Abbas at the UN General Assembly on 23 September, was criticised by the Obama administration - which has said it will veto the UN application - and Israel. Both argue that Palestinian statehood can only be realised through negotiations with Israel. In an interview with the BBC, a member of the Palestinian legislative council, Mustafa Barghouti, said the US Congress move to withhold aid was a \"great disappointment\". \"The people who are under occupation, who are oppressed and who are deprived of their freedom are the ones who are being punished now in an act of collective punishment,\" he said, \"while the oppressors - the ones who are blocking the possibility of peace in this region, which is the Israeli government - are being rewarded.\" He said Mr Panetta\'s criticism was no comfort, because the Obama administration had shown through its threat to veto the UN membership application that \"the US administration and Congress are both working against the right of the Palestinian people to freedom, independence and prosperity\". Mr Barghouti said the Palestinians would not \"sell our freedom for some aid\", and said the move by Congress suggested aid \"is nothing but an instrument of political manipulation and pressure on people\". \"If that is the case, then I think we need an overall revision of the whole issue of aid, and we need to find ways to be self-reliant rather than dependent on foreign aid,\" Mr Barghouti told the BBC.