"IMF management continues to keep under close review ongoing developments in Indonesia and discussions for the next programme review are on hold," said the IMF spokesman.

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The news follows earlier warnings from the IMF that Indonesia faces a loss of financial aid if it is unable to solve the crisis over East Timor.

Hubert Neiss, the IMF's director for Asia, said: "The events in East Timor are first of all a large human tragedy and the international community including the IMF cannot be indifferent to that....An IMF programme can only be successful if there is the necessary internal as well as external support to the efforts.".

He said the IMF mission to Jakarta, scheduled for later in the month to discuss the next installment of lending, was now on hold.

The IMF came to the rescue of Indonesia in 1997 after the country's currency was devalued, and its aid is still vital to keeping the economy afloat.

IMF support unleashed aid from other donors, and in all $47bn has been pledged by the West - including $25bn from the World Bank, the IMF's sister institution that funds long-term development.

On Wednesday the World Bank warned Indonesia that it was in danger of breaching the commitments it made at the last donor conferenc in July to allow a peaceful transition to independence in East Timor.

Bank scandal

The IMF also said that the continuing corruption in the country was making it difficult for its reform programme to work.

Financial markets have been rocked by the Bank Bali scandal, in which a leading Indonesian bank was accused of paying an $80m "commission" to the deputy treasurer of the ruling Golkar party in order to secure the return of some loans seized by the government.

The commission was widely seen as an attempt to fund the re-election of President Habibie. The scandal has also implicated key officials in charge of Indonesia's programme of bank restructuring, considered a key part of the economic reforms.

"It certainly it is a major case of corruption and therefore very important for the IMF. Remember, the IMF programme from the very beginning had anti-corruption measures as a major element," Mr Neiss said.

Indonesia's economy is still shrinking, and any withdrawal of foreign aid could have serious consequences, especially for the large part of the population that was forced into poverty by the crisis.