The Palestinian Authority was a product of the Oslo process, which began with the signing of the Israeli-Palestinian Declaration of Principles on the White House lawn in September 1993. While Oslo grew out of a secret diplomatic track initiated by Norway, the U.S. quickly took over as the main sponsor, and acted as overseer of the process and, tacitly, patron of the Palestinian Authority itself.
The U.S. saw the PA as a useful tool for accomplishing a key U.S. goal: stability and normalization in the occupied Palestinian territories. The PA's authority was limited politically and geographically, and derivative ultimately of Israeli power. Israel viewed the PA largely as an agency that would take responsibility for organizing social and economic life in the Palestinian territories, including schools, health, welfare, etc., thus alleviating Israel's obligation under the Geneva Convention to take care of the lives of the occupied population. Later, when Palestinian resistance to the occupation escalated, and especially with the emergence of suicide bombing attacks inside Israel, both Israel and the U.S. began to view the PA as a security agency—not to protect the lives and safety of Palestinians living under occupation, but to prevent any attacks on Israel. It was as if the Palestinian Authority was to serve as a surrogate for Israel's own power—assigned the job of keeping Palestinians under control.
Unlike the PA, the PLO's history was that of a nationalist movement fighting against an occupying power. Its means of fighting, both military and diplomatic, were similar to those of many other liberation movements, particularly during the anti-colonial wars of the 1960s and 70s. Yet Washington, as was true in so many other cases of liberation movements fighting against U.S. allies, identified the PLO as a "terrorist" organization, the same brush that tarred the African National Congress and its leader, Nelson Mandela, until well into the 1990s. As a result, despite United Nations and widespread international recognition of the PLO as the sole legitimate representative of the Palestinian people, the U.S. refused to recognize or negotiate with the organization. Instead, the U.S. backed Israeli efforts to anoint various Palestinian leaders and notables as the "acceptable" Palestinians, and U.S.-led diplomatic efforts failed.