The Pakistan military declared it did not need US military aid as the White House confirmed that it would withhold some $800m (£498m) in assistance to the country's armed forces.

The row will worsen the already poisonous relationship between the two "allies", which since the unilateral US raid to kill Osama bin Laden in May has lurched towards breakdown.

Pakistan recently expelled US military trainers from the country, limited the ability of US diplomats and other officials to get visas, and restricted CIA operations on its territory. "The Pakistani relationship is difficult but it must be made to work over time. But until we get through these difficulties we will hold back some of the money that the American taxpayers have committed to give them," William Daley, the White House chief-of-staff, told ABC News on Sunday.

At stake is Pakistani co-operation against al-Qaida, the Taliban and other extremist groups, which the increasingly bitter relationship is putting at risk. Much of al-Qaida's remaining leadership is believed to be hiding in Pakistan, while Pakistani territory is used as a safe haven by Afghan Taliban and the allied Haqqani network, fighting across the border in Afghanistan.

The new US defence secretary, Leon Panetta, said over the weekend that he believed Bin Laden's successor, Ayman al-Zawahiri, was in Pakistan's tribal area and "he's one of those we would like to see the Pakistanis target". Pakistan responded by asking for the US to share the intelligence on Zawahiri's whereabouts.

Nuclear-armed Pakistan is meanwhile fighting its home-grown extremists in the tribal area on the border with Afghanistan, where a new offensive was launched earlier this month. Major General Athar Abbas, the chief spokesman for the Pakistan military, said that the military had received no formal notification of any aid being cut. He also pointed out that the army chief, General Ashfaq Kayani, had already declared that cash reimbursements to the military, known as coalition support funds, should go instead to the civilian government, where there was more need.

"We have conducted our [anti-extremist] military operations without external support or assistance," said Abbas. "Reports coming out of the US are aimed at undermining the authority of our military organisations."

Critical stories about Pakistan are leaked on an almost daily basis to the American press, riling Pakistani public and official opinion against Washington. Many in Pakistan believe there is a concerted American effort to weaken Pakistan and its armed forces, which are some of the largest in the world.

For Washington, Pakistan's refusal to launch an offensive against the Haqqani network and suspicions that Bin Laden benefited from some kind of official support to live in Pakistan has corroded ties.

There are also questions hanging over future civilian aid, which is meant to provide $1.5bn a year in economic help.

Cyril Almeida, a columnist with Pakistan's Dawn newspaper, said the country was in danger of becoming internationally isolated, while US policy towards Pakistan was muddled.

"The US can't decide they if they want to stay in this relationship or cut Pakistan off," he said. "These leaks and pressure tactics just confirm to the army generals the view that America is no friend of Pakistan and it wishes Pakistan harm."

Since 2001, the US has provided $21bn in civilian and military assistance, including $4.5bn in the 2010-2011 financial year, as aid was increased under the Obama administration. Two proposed bills in Congress over the last week, which were voted down, would have cut off aid to Pakistan altogether.

Pakistan's economy is spiralling downwards, with electricity shortages shutting down industry, and rising food and fuel prices causing protests on the streets. Karachi, the country's economic powerhouse, is often shut down by ethnic gang violence, which has claimed more than 100 lives in the current spate of bloodshed.