Huge numbers of children were enrolled after 2003
The US has suspended $7m of funding for free primary schools in Kenya until fraud allegations are investigated, the US ambassador in Nairobi has said.
Michael Ranneberger says "credible action" must be taken on claims that 110m shillings (£900,000; $1.4m) were siphoned off a free-education fund.
The US move comes a month after the UK government pulled out of the project.
Kenya is ranked as East Africa's most corrupt country by campaign group Transparency International.
The US has been pushing for reform in Kenya since deadly violence swept the country after an election in 2007.
Although the violence was primarily political and ethnic, US officials have highlighted underlying causes such as corruption and weak institutions.
Future 'in the balance'
Mr Ranneberger demanded an independent audit of the free-schools programme.
"Those culpable for the fraud should not only be sacked - they need to be prosecuted and put behind bars," he said.
"The US shares the deep concern of Kenya's development partners and the Kenyan people regarding the continuous revelations of large-scale corruption."
He reiterated demands for wider changes in the country, saying "the reform agenda and the future of this country hangs in the balance".
Kenya introduced free primary education in 2003 - and schools were quickly swamped as more than one million children were enrolled who had never been to school before.
Unicef says the primary school population jumped from 5.9 million in 2002 to 7.6 million in 2005.
Most of the funding for primary education comes from government coffers.