Russia has ordered USAID to cease operations in the country, accusing the aid mission of being a front of the American government's effort to influence its local politics and the outcome of elections.
Moscow's move on Wednesday is seen as a slap in the face on the administration of President Barack Obama, who has been seeking to "reset" bilateral ties with its former rival.
Obama, who is facing re-election in November, is being accused by his Republican rival Mitt Romney of being soft on Russia.
Analysts said they believed the Russian decision partly reflected Moscow's hostility toward US-funded groups that seek
to promote democracy and the rule of law in Russia.
"It's about attempts to influence political processes, including elections of various types, and institutions of civil society through the distribution of grants," Russia's Foreign Ministry said in a statement.
It added Moscow had serious questions over the operations of the US Agency for International Development (USAID) in Russia's regions, especially in the North Caucasus where Russia is fighting an armed Islamist rebelion.
Victoria Nuland, the US state department spokeswoman, said Russia's decision will not affect American policy towards Russia.
"The American government remains committed to supporting democracy, human rights, and the development of a more robust civil society in Russia, and look forward to continuing our co-operation with Russian non-governmental organizations," Nuland said.
Clampdown on dissent
Steven Pifer, a former US ambassador to Ukraine who is now at the Brookings Institution think tank, said he believed the decision reflected some reluctance by the Russian government to see foreign support for pro-democracy efforts in the country.
"They see AID's efforts in Russia as being a prime funder of the NGOs that are concerned about their elections and concerned about the regression of democracy in Russia," Pifer said.
He said the Russian government, basking in oil revenues, no longer believed it should be a recipient of foreign aid and may also be "trying to make it more difficult" for the outside world to support pro-democracy NGOs, or non-governmental
organizations, in Russia.
Over the last 20 years, the US has provided Russia with more than $2.6bn in aid. In 2011, Russia received $50m from the US through USAID.
Critics of President Vladimir Putin, who back in the Kremlin for a third term after serving as prime minister, said the move is part of a clampdown on dissent sponsored by the ex-KGB spy.
Moscow is tightening Internet controls and has raised fines for protesters, among others, sparking criticism among rights groups that it is trying to stifle opposition against Putin's 12-year rule after a winter of protests.