US President Donald Trump's Middle East peace envoy said Thursday Israel would supply the Palestinians with millions of cubic metres of water annually, as Washington seeks to build confidence for fresh negotiations.

Jason Greenblatt hailed an "important step forward" in a wider regional water deal, as Israel announced it would provide more than 32 million cubic metres of water to the Palestinians annually.

"Water is a precious commodity in the Middle East. The United States welcomes the agreement reached by the Palestinian Authority and the government of Israel which will allow for the sale of up to 33 million cubic metres of water from Israel to the PA," Greenblatt said at a signing ceremony in Jerusalem.

Israel's Regional Cooperation Minister Tzachi Hanegbi and Mazin Ghunaim, head of the Palestinian Water Authority, also attended.

Palestinians suffer from water shortages and say the unequal distribution of water resources favours Israel.

The deal announced Thursday is part of a wider water project involving the Red and Dead Seas to be developed over the next five years, but the Palestinians are likely to begin receiving water from it before then, Hanegbi said.

It came after Greenblatt helped broker an agreement between the two sides on the price and quantities of water, as well as where the connection points will be.

The deal is supposed to ease water scarcity in the Palestinian territories, including in the Gaza Strip, where more than 95 percent of water is undrinkable.

Ghunaim said 22 million cubic metres would go to the Israeli-occupied West Bank, while a further 10 million would go to Gaza.

"This will reduce the suffering of the Palestinian people which has been worsened by the beginning of summer and the crises that they are living through," he said.

The deal is part of a pre-existing plan to link the Dead Sea and the Red Sea by pipes in Jordan.

The plan would also seek to reverse the disappearing of the Dead Sea, which sinks by about a metre a year according to Israeli officials.

The primary cause is overuse of water upstream.

In 2013, Israel, Jordan and the Palestinians signed a memorandum of understanding on the water project that included plans to build a desalination plant at the Red Sea.

Hanegbi said the wider agreement was the "most ambitious" in the history of the region.

"It will supply (a) significant amount of water to Jordan, to Israel and to the Palestinians."

Greenblatt is seeking to restart peace negotiations between the Israelis and the Palestinians, stalled since talks collapsed in 2014, with Trump saying he wants to reach the "ultimate deal".

There is however heavy scepticism over whether meaningful talks can be held now, with 82-year-old Palestinian president Mahmud Abbas unpopular and Israeli Prime Minister Benjamin Netanyahu heading what is seen as the most right-wing government in his country's history.

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