By Qasim Nauman and Augustine Anthony
ISLAMABAD (Reuters) - A U.S. Congressional panel has frozen $700 million in aid to Pakistan until it gives assurances it is helping fight the spread of homemade bombs in the region, a move one Pakistani senator called unwise and likely to strain ties further.
Pakistan is one of the largest recipients of U.S. foreign aid and the cutback announced is only a small proportion of the billions in civil and military assistance it gets each year.
But it could presage even greater cuts. The aid freeze targets funds used to fight Taliban insurgents.
Calls are growing in the United States 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 Qaeda leader Osama bin Laden was killed in May.
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.
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 United States 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 United States 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.
But U.S. lawmakers have expressed increasing frustration with Pakistan's efforts in the war.
There have been many proposals to make U.S. aid to Pakistan conditional on more cooperation in fighting militants such as the al Qaeda-linked Haqqani network, which Washington believes operates out of Pakistan and battles U.S. troops in Afghanistan.
But Pakistan's civilian leaders have in the past warned against aid cuts, saying it would only harden public opinion against the United States.
Pakistan says it is doing all it can to fight al Qaeda 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.
"I must say that the aeriel attacks on our army border posts on November 26, 2011, constituted a huge setback to the prospects of much needed cooperation between all important stakeholders," Prime Minister Yusuf Raza Gilani told a gathering of Pakistani ambassadors to other countries.
The decision to freeze aid could prompt Pakistan to harden its stance towards 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," former general and security analyst Talat Masood said.
"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."
Pakistan's Foreign Ministry spokesman, Abdul Basit, also suggested pressure from the United States would hurt ties, saying Islamabad believes "in cooperative approaches."
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 tonnes 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.
Analysts say U.S. demands will be tough to meet because of rampant corruption on both sides of the porous border that makes smuggling easy.
One businessman explained how easy it is to get through security.
"We pay a 1,200-rupee ($13) bribe to the Pakistani Frontiers Corps on the border for every car carrying Fertilizer," said Kamal Khan in the border town of Chaman.
"Fertilizer is smuggled on trucks, pickup trucks, motorcycles, bicycles and donkey carts."
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.
(Additional reporting by Saeed Ali Achakzai in CHAMAN and Susan Cornwell in WASHINGTON; Writing by Michael Georgy; Editing by Paul Tait)