The World Bank has suspended a planned $90m loan to Uganda meant to strengthen its health care system after its president signed into law a bill prescribing harsh jail terms for homosexual offences.
The decision by the global lender comes days after Denmark, the Netherlands and Norway said they would also freeze or change aid programmes for Uganda because of the law.
The law will see those convicted of "aggravated homosexuality" - defined as sex between gay men and minors or the disabled - jailed for life.
"We have postponed the project for further review to ensure that the development objectives would not be adversely affected by the enactment of this new law," a World Bank spokesman said, according to the AFP news agency.
With a per capita income of $506, Uganda relies heavily on donor aid and suspension of aid could affect many development programmes.
Government spokesman Ofwono Opondo shrugged off foreign aid cuts and international criticism, saying Uganda can do without Western aid.
"The West can keep their 'aid' to Uganda over homos, we shall still develop without it," he said in a message on Twitter.
Yoweri Museveni, the Ugandan president, signed off the bill, described as one of the world's toughest anti-gay laws, despite condemnation from Western leaders and human rights groups.
Barack Obama, the US president, had warned the president that he risked complicating diplomatic ties between the two nations if he signed the bill into law.
US Secretary of State John Kerry on Wednesday compared the "flat-out morally wrong" and "atrocious" law to anti-Semitic legislation in Nazi Germany or apartheid in South Africa.
Leading Ugandan gay rights activist Frank Mugisha met in Washington on Thursday with top State Department officials to call for help in protecting gays.
A State Department official said Mugisha met the top US diplomat for Africa, Linda Thomas-Greenfield, and acting assistant secretary for human rights Uzra Zeya, to discuss "mutual concerns" about safety and "how the US might respond to the law's enactment".
Diplomats and rights groups had pushed Museveni - already under fire from key Western donors over alleged rampant graft and for stifling opposition groups and media - to block the legislation.
But in a blunt speech after signing the law, Museveni warned Western nations not to meddle in the east African country's affairs and said he was not afraid of aid being cut.
Homophobia runs deep in Uganda and many Ugandans and religious leaders had called on Museveni to sign the bill into law, saying it would help curb what they called a Western "vice".