The United States has accused Iran of harbouring al-Qaeda leaders responsible for planning last week's suicide attacks in the Saudi capital Riyadh.
Reports from Washington say that, in protest, US officials have broken off the dialogue they had been conducting with Iranian officials in Geneva.
US officials have accused Iran of sheltering fugitive members of al-Qaeda ever since the group lost its base in Afghanistan last year.
Iran's supreme leader has not shown much enthusiasm for talks
Iran has consistently denied such allegations.
US officials suspect the bombings in Riyadh were planned by al-Qaeda leaders in Iran. These allegedly include Saif al-Adel, an Egyptian whom some regard as al-Qaeda's current number three leader.
Saudi officials have added to the speculation that he may have planned the Riyadh bombings. But his role, and indeed his whereabouts, are uncertain.
But whatever the truth behind the allegations, the Americans are furious with the Iranians.
The latest meeting between the two sides was due to have taken place in Geneva on Wednesday, but reports from Washington suggest this has now been cancelled.
Even a discreet dialogue in a famously discreet Swiss city has proved highly sensitive for both sides.
In Washington influential hawks are openly advocating "regime change" in Iran. They strongly oppose dialogue with a state which President George W Bush has branded part of an "axis of evil".
Iran's leading conservative, the supreme leader Ayatollah Khamenei, has shown a marked lack of enthusiasm for the Geneva channel.
So a tentative attempt to improve relations has proved short-lived, and both sides have returned to their habitual hostility and mistrust.