The World Bank will not provide any new loans to Cambodia until it resolves a dispute about a mass eviction from a lakeside area in the capital, according to a statement seen by AFP on Tuesday.
A private company headed by a ruling party politician is filling in a lake in central Phnom Penh for commercial development, a controversial project that will eventually displace some 4,000 families.
"Until an agreement is reached with the residents of Boeung Kak lake we do not expect to provide any new lending to Cambodia," said World Bank country director Annette Dixon in a statement sent to AFP by the bank on Tuesday.
The bank admitted in March it had failed to protect the lake dwellers while working on a land titling project in the country a few years ago, and offered to help the government find a solution for the residents.
At the time, the bank also warned it would reconsider its work in Cambodia if the government failed to stop the forced relocations.
It now appears to have followed through on the threat, with Dixon saying its most recent loan to Cambodia was in December 2010.
Government spokesman Phay Siphan said the government had already stated late last year that it "no longer appreciated" the loans from the World Bank.
"The bank is not a proper help to Cambodia in the cause of development," he told AFP.
More than 3,000 lakeside families have already left the area, often after their homes were flooded with mud as the lake was filled in, and had to accept what little compensation was on offer, according to housing rights groups.
The remaining families, who have held frequent protests in recent months, are holding out for a plot of land on the same site or adequate compensation and are currently in talks with city officials and the company.
"Discussions between the government and residents are ongoing and we look forward to an early resolution of this issue," Dixon said, adding that the bank's existing programmes in Cambodia would continue as normal.
The bank currently has more than 20 active projects in Cambodia to which it has committed over $400m, according to its website.
Cambodia has faced mounting criticism in recent years from rights groups and the United Nations over a spate of forced evictions around the country that have displaced tens of thousands of mostly poor people.
Land disputes have been a major problem in the country since land ownership was abolished during the 1975-1979 rule of the communist Khmer Rouge and many legal documents were lost during that time.