Clinton used an international donors conference to issue a call for action in the effort to forge a comprehensive Arab-Israeli peace. She also signaled a possible warming in U.S. relations with Syria after several years of division.
While the aid announcement marks a shift in policy from the previous administration, Secretary Clinton said that no money would go to the militant Islamist Hamas group, which is classified as a terrorist organization by the U.S., and is the ruling power in the Gaza Strip.
"We have worked with the Palestinian Authority to install safeguards that will ensure our funding is only used where and for whom it is intended and does not end up in the wrong hands," said Clinton during a donors' conference in Sharm El Sheik, Egypt.
One third of the U.S. aid is for Gaza and is aimed at accelerating peace efforts in the region. During Monday's meeting she met with top officials from Saudi Arabia, Egypt, the United Arab Emirates, Italy and others.
"Our response to today's crisis in Gaza cannot be separated from our broader efforts to achieve a comprehensive peace," Clinton said.
"Only by acting now can we turn this crisis into an opportunity that moves us closer to our shared goals ...We will vigorously pursue a two-state solution to the Israeli-Palestinian conflict."
Clinton also called on the Palestinian public to participate in the peace process.
"For the Palestinians, it means that it is time to break the cycle of rejection and resistance and to cut the strings pulled by those who exploit the suffering of innocent people," she said.
Clinton also said that Israel cannot "just sit and take rockets" from Gaza as she stressed the Obama administration's commitment to finding a peaceful existence for Israelis and Palestinians.
Of the $900 million in aid, which still has to be approved by Congress, $300 million has been designated to provide humanitarian aid for Gaza after Israel's three week offensive in December to try and stop rocket attacks. Another $200 million is expected to help with budget shortfalls in Palestinian President Mahmoud Abbas' government and $400 million is for economic reform, private sector and other projects on the West Bank.
"Everyone is in agreement that we need to shore up the Palestinian Authority," Robert A. Wood, the acting State Department spokesman, told news organizations. "We don't want that money to go through Hamas."
In addition to the U.S., other international donors also made significant contributions to Gaza, with up to $4.4 billion pledged on Monday to help rebuild the Palestinian economy. Like the U.S., other donors insisted that their funds bypass the territory's Hamas rulers.
However, there is also pressure on Israel to reopen the border crossings into Gaza.
"The situation at the border crossing is intolerable. Aid workers do not have access. Essential commodities cannot get in," U.N. Secretary-General Ban Ki-Moon told donors.
"Our first and indispensible goal, therefore, is open crossings. By the same token, however, it is therefore essential that illegal weapons do not enter Gaza," he said.
The Sharm el-Sheik conference also offered a possible signal of warming of U.S. relations with Syria. Clinton shook hands and spoke briefly with Syrian Foreign Minister Walid al-Moallem, the Associated Press reported. They were not scheduled to meet but encountered each other during the daylong conference, a U.S. official told the news agency, speaking on condition of anonymity.