By Martin Plaut
BBC Africa editor
The European Commission is considering action against Eritrea in protest at food aid being sold, and the proceeds used for government work programmes.
Relations between government and donors have worsened
Eritrea may be asked to repay the $3m cost of food thought to have been sold. The EC's ambassador to Eritrea, Geert Heikens, told the BBC that attempts to discuss the matter with the authorities had failed, and that action was needed.
The row comes at a time when more than 15% of Eritreans are malnourished and the country depends on outside aid.
The Eritrean government introduced a new policy of cash-for-work in May, saying this was to prevent the population becoming dependent on outside aid.
Food aid to the value of $3m received from donors has been sold to fund this scheme, the EC says.
The policy change was made without consultation with the donors, who had clear guidelines about the terms under which their food was being provided.
Ambassador Heikens says Europe's patience has now been exhausted.
"I am sending already endless letters since May to the Ministry of Development and the Ministry of Labour and Human Welfare," he said.
"Every moment I see them I ask them - but they don't react. So we are now indeed in discussion with Brussels about what measures we can take."
The country remains dependent on aid
A request for the repayment of $3m is one of a number of possible steps being considered.
The ambassador adds that the lack of transparency about the food aid question can be explained by the Eritrean political system, which tolerates neither a free press, nor any kind of opposition.
"I think it is inherent in the political system we have here in Eritrea," Ambassador Heikens said.
"It is not a democracy. It is far from a democracy. You can say it's a dictatorship under the presidency of President Isaias (Afewerki)."
Relations between donors and the Eritrean government have deteriorated badly.
There are strict travel restrictions controlling their movements outside the capital, Asmara.
About 100 vehicles belonging to aid agencies have been confiscated by the government, and many agencies banned.