Ramallah has banned Iranian financial assistance from reaching the families of Palestinians killed by Israel directly.
Palestinian presidency spokesman Nabil Abu Rudeina, cited by local media, said that the authority rejected Tehran handing out cash to the families directly.
He added that this would constitute illegal interference in internal Palestinian affairs.
"[Iran should] send this money through official channels to the [PA's] Martyrs and Prisoners Foundation rather than relying on informal and circuitous routes," Abu Rudeina said.
Iran's ambassador to Lebanon, Mohammad Fathali, said Wednesday that Tehran would offer $7,000 to the families of each Palestinian killed in what he called the "Jerusalem intifada".
Iran will also give $30,000 to Palestinian families whose homes have been destroyed by Israel because a member is accused of carrying out anti-Israeli attacks, he told a news conference in Beirut.
The money pledged is in addition to the monthly aid paid since 1987 by an Iranian institution to families of Palestinians killed, he said.
Around 177 Palestinians and 28 Israelis have been killed since violence in the West Bank spiked over the past five months.
Iran has been accused of providing support to Hamas, which runs the Gaza Strip, although tensions have increased since Tehran increased its support for Syria's President Bashar al-Assad.
Palestinian economists have questioned whether Iran would be capable of distributing the aid to the families directly via banks since it could be considered "terrorism financing".