Asked if the US government is anticipating security concerns in either Jerusalem or in the Palestinian controlled areas, the senior State official said there was no "imminent or particular threat" but that the safety of Americans overseas is the highest priority.
In December, President Trump upended decades of US foreign policy by recognizing Jerusalem as Israel's capital.
For years, the consulate has served as a defacto embassy to the Palestinians, reporting straight to the State Department in Washington.
"The US decision to end the existence of the US Consulate. has nothing to do with "efficiency" and a lot to do with pleasing an ideological US team that is willing to disband the foundations of American Foreign Policy, and of the global system, in order to reward Israeli violations and crimes", he said in a statement. "The Trump administration is part of the problem, not part of the solution", the high-ranking Palestinian official said.
He said the USA has effectively killed the two-state solution that envisioned an independent Palestinian state in the occupied West Bank and Gaza alongside Israel.
Pompeo denied the decision represented a shift in policy, but it came after a series of moves, including shuttering the Palestinian mission in Washington and moving the U.S. embassy from Jerusalem to Tel Aviv.
US Secretary of State Mike Pompeo said the Trump administration was committed to a peace effort between Israel and the Palestinians..
Israel regards all of the city, including the eastern sector it captured in the 1967 Middle East war and annexed, as its "eternal and indivisible capital", but that is not recognized internationally.More news: Turkey says authorities have concrete information on missing Saudi journalist
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The consulate downgrade is just the latest in a series of decisions by Trump that the Palestinians say shows bias against them. The Palestinians want the city as the capital of their future state.
The status of Jerusalem - home to sites holy to Muslims, Jews and Christians - is one of the core issues in the Israeli-Palestinian conflict.
Angered by Trump's move, Palestinian president Mahmud Abbas boycotted his administration, saying Washington is no longer qualified to serve as the sole mediator in the decades-long conflict with Israel, and that an worldwide mechanism should be devised to replace the United States in the so-called peace process.
The announcement "closing the US consulate in Jerusalem and transferring its responsibilities to the embassy ends the last vestige of American support for the city's division".
The move Thursday almost closes off all direct diplomatic contacts between the U.S. and the Palestinians, analysts said.
"Other countries have gone to great lengths to avoid having the same representatives to Israel and the Palestinian Authority", he told AFP, pointing out even small countries separate their Palestinian and Israeli operations.
Australian Prime Minister Scott Morrison reportedly told Israeli Prime Minister Benjamin Netanyahu on Monday that he had been considering doing the same - a potential move which, if enacted, would make Australia the largest country since the United States to recognise Jerusalem as Israel's capital.
Trump has been angered by the Abbas boycott and has cut hundreds of millions of dollars in aid in a bid to force them back to the negotiating table. It also announced the closure of the Palestinian Liberation Organization's diplomatic mission in Washington over what it said was the Palestinians' refusal to engage in peace talks with Israel.