Palestinians condemn US veto of ex-PM as Libya envoy
UN chief Antonio Guterres nominated Fayyad to the post on Thursday and the Security Council had been expected to approve his appointment without objections.
But late on Friday, US ambassador Nikki Haley announced she was blocking the appointment because "for too long, the UN has been unfairly biased in favour of the Palestinian Authority to the detriment of our allies in Israel."
Palestine Liberation Organisation executive committee member Hanan Ashrawi dismissed the "flimsy excuse" for a move she described as "unconscionable."
"Blocking the appointment of Dr Salam Fayyad is a case of blatant discrimination on the basis of national identity," she said.
Fayyad, 64, was prime minister of the Palestinian Authority from 2007 to 2013, and also served as finance minister twice.
He had been tapped to replace Martin Kobler of Germany, who has been the Libya envoy since November 2015.
US President Donald Trump and Haley have criticised the United Nations for adopting a resolution in December that demanded an end to Israeli settlement building.
"Going forward, the United States will act, not just talk, in support of our allies," Haley said on Friday.