The UK is withholding £50m it had pledged to the World Bank in protest at conditions it attaches to aid.
The World Bank's loan conditions have drawn criticism
International Development Secretary Hilary Benn voiced concerns that the Bank is telling poorer nations how to run their affairs.
Oxfam said it welcomed the move by the UK government, adding that the World Bank's policy on aid was "disastrous".
Mr Benn's comments came on the eve of the World Bank and International Monetary Fund's annual meetings.
He is concerned that the Bank has been demanding too strict conditions before giving aid to developing countries.
Mr Benn said the Bank had a duty to help those in poverty despite the actions of their governments.
The Bank has for a long time insisted that the countries it lends to meet economic targets and has encouraged trade liberalisation.
In addition, since taking over as head of the Bank last year, World Bank chief Paul Wolfowitz has made it his mission to tackle corruption in poorer countries.
His campaign has led to hundreds of thousands of dollars of loans and contracts to countries like Chad, Congo, Ethiopia and Bangladesh being suspended.
Mr Benn told Mr Wolfowitz that the UK is unhappy with the lack of progress at removing strict conditions on financial assistance.
Last year, the UK provided £1.3bn to the Bank to help poorer countries and promised to donate a further £50m in 2007, provided it eased the strings attached to aid.
However, Mr Benn has said he will now delay handing over the cash until he is satisfied the World Bank has eased its position on economic liberalisation.
"Most people would agree that if you're invading your neighbour, if you're oppressing your population or if you're taking aid money and spending it on other things, then we shouldn't stand for that and we won't," Mr Benn told the BBC.
"Britain doesn't and nor does the World Bank and we should attach conditions in those circumstances.
"But on other issues, particularly economic policy, developing countries ought to take their own decisions and I do believe that this is one of the ways that we can increase the voice of the poorest countries of the world," he added.
Oxfam and other campaigners such as Christian Aid say the World Bank's current policies often leave people in developing countries worse off than before.
"Imagine what life would be like if you had to run every decision you made by your bank manager and if he or she didn't like it, you would have to change it," Christian Aid policy manager Anna Thomas said.
"That is the reality for many poor countries and they can't just switch accounts."
Christian Aid points to the example of Ghana where the World Bank's demand for a ban on tariffs and subsidies for the poultry market has led to an influx of cheap European imports and seen many thousands of Ghanaians lose their jobs and livelihoods.