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US halts $700 million in aid to Pakistan, demands action on Taliban bombs

Story updated 8:35 a.m. ET:

A senior Pakistani official told NBC News the United States' decision to cut aid to Pakistan would only contribute to the growing sense of anti-Americanism within the population.

He said the cut would deepen the perception within Pakistan that U.S. interests extend so far as its own foreign policy goals and would "strengthen our resolve to formalize and renegotiate our terms of engagement with USA."

Following the NATO crossborder strike on November 26 that killed 24 Pakistani soldiers, military and government officials in Pakistan have called for a reassessment of the relationship with the U.S.

The Army Chief issued new rules of engagement for his ground troops and commanders, granting them "full liberty" to respond with force if ever under attack, without any form of higher clearance.

Story published 5:35 a.m. ET:

ISLAMABAD - The United States has frozen $700 million in aid to Pakistan until it gets assurances that Islamabad is helping fight the spread of homemade bombs, a move likely to further strain ties between the countries.

A Congressional panel halted the payment to Pakistan, a nuclear-armed country that is one of the largest recipients of U.S. foreign aid, late on Monday as part of a wider review of defense spending.

Calls are growing in the U.S. to penalize Islamabad for failing to act against militant groups and, at worst, helping them, after the secret U.S. raid on a Pakistan garrison town in which al-Qaida leader Osama bin Laden was killed in May.

At least two dozen Pakistani troops along the Pakistan-Afghanistan border were killed by NATO aircraft, straining already tense relations between the U.S. and Pakistan. NBC's Atia Abawi reports.

Homemade bombs, or improvised explosive devices (IEDs), are among militants' most effective weapons against U.S. and coalition troops in Afghanistan as they struggle to fight a resurgent Taliban insurgency.

Many are made using ammonium nitrate, a common fertilizer smuggled across the border from Pakistan.

The freeze on U.S. aid was agreed as part of a defense bill that is expected to be passed this week.

The U.S. wants "assurances that Pakistan is countering improvised explosive devices in their country that are targeting our coalition forces," Representative Howard McKeon, a House Republican, told reporters.

The U.S. has allocated some $20 billion in security and economic aid to Pakistan since 2001, much of it in the form of reimbursements for assistance in fighting militants.

Although the frozen $700 million is only a small portion of aid to Pakistan, it could presage even greater cuts.

Harm to Pakistan-US relations
Salim Saifullah, chairman of Pakistan's Senate foreign relations committee, warned that relations, which are already at a low point, could worsen further following the decision, by the U.S. House-Senate panel.

"I don't think this is a wise move. It could hurt ties. There should instead be efforts to increase cooperation. I don't see any good coming out of this," Saifullah told Reuters.

There have been many proposals to make U.S. aid to Pakistan conditional on more cooperation in fighting militants such as the al-Qaida-linked Haqqani network, which Washington believes operates out of Pakistan and battles U.S. troops in Afghanistan.

The White House is being careful in its response in part because officials don't have all the facts. NBC's Kristen Welker talks to NBC's Lester Holt about the balancing act.

But Pakistan's civilian leaders have in the past warned against aid cuts, saying it would only harden public opinion against the U.S.

Pakistan says it is doing all it can to fight al-Qaida and the Taliban and has lost thousands of soldiers since it joined the U.S.-led war in 2001, some of them at the hands of coalition troops.

Islamabad has accused NATO of deliberately killing 24 Pakistani soldiers in an air strike near the Afghan border last month and shut down supplies for foreign troops in Afghanistan in anger.

The decision to freeze aid could prompt Pakistan to harden its stance toward Washington.

"I think the Pakistan side will understand the type of signal that is coming, which shows it's not only a question of aid," said former general and security analyst Talat Masood.

"The whole attitude of the U.S. and the relationship will be affected by these measures because they know Pakistan will not be in a position to control the smuggling."

Two fertilizer factories
U.S. lawmakers said many Afghan bombs are made with fertilizer smuggled by militants across the border from Pakistan into Afghanistan.

"The vast majority of the material used to make improvised explosive devices used against U.S. forces in Afghanistan originates from two fertilizer factories inside Pakistan," Republican Senator John McCain said in the Senate last week.

A Congressional Research Service report in October said the Pakistani factories, owned by one of the country's biggest companies, Pakarab, have been producing over 300,000 metric tons of ammonium nitrate per year since 2004.

The United States has urged Pakistan to regulate the distribution of ammonium nitrate to Afghanistan strictly. So far, Pakistan has only produced draft legislation on the issue.

Pakistan's fragile economy is heavily dependent on agriculture, so cutting down on fertilizer output would hurt the sector.

The provision freezing $700 million in aid was agreed upon by leaders of the armed services committees from both parties in the House and Senate, including McCain. It is part of compromise legislation authorizing U.S. defense programs expected to be approved this week, McKeon said.

The bill would also require the Pentagon to deliver a strategy for improving the effectiveness of U.S. aid to Pakistan, he said.

NBC News and Reuters contributed to this report.

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