The money will be passed to the Palestinian Authority over the next three years and will be spent on grassroots measures like putting more police on the beat and building police stations and courthouses to create conditions for a viable Palestinian state.
The donations are a result of efforts at an international conference in Berlin that began on Tuesday aiming to bolster the rule of law in the Palestinian territories and create the necessary conditions for the creation of a viable state.
US Secretary of State Condoleezza Rice was at the conference and called on donor nations to make good on their commitments to the Palestinian Authority and help build the security infrastructure needed for a viable state.
"The Palestinian Authority (PA) has put together a comprehensive list of projects that must be funded for the criminal justice sector to succeed," Rice said.
"Because of the inter-related nature of the criminal justice sector it is crucial for the donor community to take on all the projects that the PA has identified," she told the donor conference in Berlin.
Rice was speaking ahead of a meeting of the Middle East Quartet -- the United States, the United Nations, the European Union and Russia -- later Tuesday and as a truce between Israel and Hamas entered its sixth day.
German Foreign Minister Frank-Walter Steinmeier said at an Israeli-European security forum ahead of the conference that, “The conditions for a peaceful solution are better today than they have been in the last 10 years. More security for the Palestinians also means more security for Israel ... Only when people in Israel and the Palestinian territories start to see an improvement in their lives will they put their trust in talks."
Earlier, the Israeli military said it had killed two Palestinians in the West Bank, one of them a senior member of the Islamic Jihad group, and militants in Gaza fired a rocket into Israel for the first time since the truce began.
The heads of the Israeli and Palestinian negotiating teams as well as Rice were also due to hold talks on the sidelines, a Palestinian official said on Monday.
The international community pledged $7.4 billion in Paris in December for improving conditions in the Palestinian territories after peace efforts were relaunched at a conference at Annapolis in the United States in November.
The PA's list of projects -- praised by Quartet envoy Tony Blair as "proper and comprehensive" -- is not about tackling militants but focused more on grassroots measures like putting more police on the beat and building courthouses.
The EU Police Mission in the Palestinian Territories (EUPOL COPPS), set up in 2005 to train the Palestinian police force, said before the meeting that donor nations would be called upon to earmark $187 million for the projects.
But Palestinian prime minister Salam Fayyad told the conference that while better security conditions were vital for the creation of a Palestinian state, such improvements must be accompanied by other measures such as an immediate freeze on new Israeli settlements and the dismantling of Israeli checkpoints.
"There needs to be progress not just on the security front but also on the political side," Fayyad said.
He also warned that the state of the PA's public finances were "critical."
Israeli Foreign Minister Tzipi Livni said that the vast majority of the Israeli population saw the need for a two-state solution but that they needed to see evidence that the eventual Palestinian nation would be a "democratic, responsible state."
"When we hand over the keys ... we need to know that our neighbour is a partner for peace," Livni said. "I need to know what is going on on the other side of the border."
Blair for his part said that a functioning criminal justice system was "fundamental for a two-state solution."
More than 40 countries sent delegations to the Berlin conference. Also present were Arab League secretary general Amr Mussa, EU foreign policy chief Javier Solana and 23 foreign ministers including Russia's Sergei Lavrov.
The conference was focused on helping the PA in the West Bank and does not cover the Gaza Strip, which has been controlled by Hamas since last year.
Gaza has been subject to a near-total Israeli blockade since Hamas seized control. The international community refuses to talk to the Islamist group until it renounces violence and recognises Israel's right to exist.