Foreign Minister Julie Bishop has sought assurances Australian aid hasn't been channelled to the families of Palestinian terrorists.
The Israeli government has claimed the Palestinian Authority pays $350 million to the families of terrorists and suicide bombers.
"Martyr payments" are reportedly up to $4620 a month.
A Department of Foreign Affairs and Trade official told a Senate estimates hearing on Thursday Ms Bishop had written to her counterpart seeking assurances Australian aid dollars weren't being used to encourage acts of violence.
Liberal senator Eric Abetz is pleased Ms Bishop has sought a "please explain".
"The Palestinian martyr fund not only encourages murder and terror attacks, it is a major barrier to peace in the Middle East," he said.
He wants Australia to cut its aid to Palestinian authorities until the fund stops, like the US did last year.
Australia allocated $43 million in total aid to the Palestinian Territories in 2018-19.
The territories covering the West Bank and Gaza Strip are among the poorest regions in the Middle East.