United States officials were especially unhappy that Egypt's president, Abdel Fattah al-Sisi, in May allowed the NGO law to go into effect.
Of the $1.3 billion the US gives Egypt every year in FMF funds, it is allowed to withhold 15 percent ($195 million) if the country is not showing progress on human rights issues, although the administration can override this-but this year it will reportedly opt not to do so.
The Trump administration denied $96 million in economic aid and delayed $195 million in military aid to Egypt Tuesday due to the country's poor human rights record.
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Egypt's top diplomat, Sameh Shoukry, was to meet with the US delegation headed by Kushner, but a modified version of the minister's schedule showed the meeting had been called off, shortly after the Americans landed in Cairo.
Sources told Reuters news agency that usa officials were unhappy that a new law regulating NGOs had been ratified.
The decision reflects a U.S. desire to continue security cooperation as well as frustration with Cairo's stance on civil liberties, notably a new law that regulates non-governmental organizations that is widely seen as part a growing crackdown on dissent, said the sources, who spoke on condition of anonymity.
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The decision also lacks a correct understanding of "Egypt's stability in light of the economic and security challenges facing the Egyptian people and also and implies a mixing of cards that may have negative repercussions on achieving Egyptian-American common interests" the statement added.
Egypt called off a scheduled meeting between its foreign minister and top USA presidential adviser Jared Kushner on Wednesday after the United States made a decision to withhold millions of dollars in aid.
"I would not say reports of difficulties with Egypt's human rights situation or its connection with North Korea are new", Satloff said.
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Egyptian officials had assured USA officials earlier this year that the law, which restricts NGO activity to developmental and social work and introduces jail terms of up to five years for non-compliance, would not go through, the sources said.