ISLAMABAD, Pakistan June 5, 2012 -- The Sesame Workshop was "dismayed" to find out today that a $20 million U.S. program to beam Elmo and his pals in Pakistan has been halted because of allegations of fraud and abuse.

The project was a co-production between U.S.-based Sesame Workshop, and Rafi Peer Puppet Workshop, based in Lahore. Newspapers reported today that Rafi Peer was allegedly using the money given by the U.S. to pay off old debts, and rewarded lucrative contracts to sources. Other allegations include building a fancy residential complex featuring swimming pools with the U.S. funds.

"Sesame Workshop was surprised and dismayed to learn about the serious allegations made against Rafi Peer Theatre Workshop. Beyond what we have read in the press, we do not know the specific details of these allegations," Sesame Workshop said in a statement.

"We hope that we'll continue our work in Pakistan and anywhere else in the world. I think we have to go step by step here," said Myung Kang-Huneke, executive vice president and general counsel of Sesame Workshop.

State Department Deputy spokesperson Mark Toner said the Pakistan Sesame Street Program totaled $20 million and that $6.7 million has already been spent by the Rafi Peer Theater Workshop.

The project was canceled after someone called an anti-fraud hotline set up by the U.S. Agency for International Development in Pakistan with a tip. The U.S. looked into the allegations of fraud and abuse and found them credible. A full investigation is still underway as to how and where the money was spent.

"No one is questioning, obviously, the value and positive impact of this kind of programming for children," said Toner. "But this is about allegations of corruption."

In a statement to the Associated Press, a spokesperson for Rafi Peer denied the allegations, saying the U.S. ended its participation due to a lack of funds, a claim Toner denied.

"We had what we believed were credible allegations," said Toner. "Rather than continue to throw good money after bad, we thought it was prudent …to cut off this program and wait for the results of the investigation."

The program, called Sim Sim Hamara, or "Our Sim Sim," was launched to much fanfare in December with plans to run for three seasons. It featured Elmo and a cast of local Pakistani characters, including a young girl in a lead role. Other characters included Munna, a 5-year old boy who played the table drums, Baily, a donkey who loved to sing, and Haseen O Jameel, a crocodile living in a well.

It also features set complete with houses, a school, and a restaurant that serves Pakistani cuisine.

In a country where one third of all young children do not attend school, the show was supposed to raise literacy, education, and tolerance. Now, its future is in jeopardy. Rafi Peer says it is looking for alternate sources of funding, for now leaving the colorful cast of characters with nowhere to play and no songs to sing.

It is the second time in recent months that federal funding for an overseas Sesame Street project was cut off. In January Congress froze $192 million funding to USAID's programs in the West Bank and the Gaza Strip in response to the Palestinian bid for statehood at the U.N. The popular Palestinian version of Sesame Street, Sharaa Simsim, had to be cancelled.