The Franklin Mint, the American company blamed for placing the work of over 100 British charities under threat, hit back on Friday night.
The Franklin Mint has a range of Diana memorabilia
It accused the Diana, Princess of Wales Memorial Fund of bad faith and insisted its retaliatory legal action was "not a matter of money" but principle.
The mint, which manufactures Diana plates, dolls and jewellery, is lodging a $25m (£15m) countersuit for malicious prosecution after the fund's failed legal attempt to stop the Mint making products bearing the princess's image.
The fund says the suit has legally obliged it to freeze funding to its 120 beneficiaries - many of which it says are "unpopular causes" which will struggle to find alternative funding.
Many of the affected charities - which work with landmine victims, refugees, young offenders and people with learning disabilities, among others - expressed dismay on Friday.
But the mint on Friday firmly rejected any blame for the freeze.
"We were disappointed to learn today that the Diana, Princess of Wales Memorial Fund has chosen to suspended its charitable giving just as we were disappointed when they chose to sue us," the Philadelphia-based firm said in a statement.
"We were relieved when the court ruled so strongly against them, finding that many of their claims were 'absurd,' 'just short of frivolous', 'groundless' and
It said it was countersuing because the Fund should be held accountable for its actions - and insisted it was "most definitely not a matter of money".
In what some of the charities might interpret as a bitterly ironic twist, the mint said it would donate any money it won to charity.
Over the past five years, the Fund has parcelled out £40m of its £50m funds. Much of the money was donated by Diana fans in the wake of her sudden death.
Among the recipients is the Refugees Arrival Project, which told BBC News Online that unaccompanied children - some as young as five - who arrive at airports would be at "terrible risk" if its funding was cut.
The fund, set up to help the causes Diana campaigned for, has now asked to borrow money from other charitable bodies, in an attempt to keep its projects going.
Its chief executive, Dr Andrew Purkis, told the BBC about £10m was needed to honour existing commitments.
It has warned beneficiaries about the crisis in the hope they can make contingency plans "to cope with such an unexpected and painful blow".
It is also trying to find a way to make sure that a freeze on new grant giving is only temporary.
Dr Purkis said: "If this doesn't work, it means that unfortunately and terribly wastefully, a lot of wonderful projects may have to close while the fund remains in a frozen state."
"We are simply not prepared to see this inspiring work destroyed."
A spokesman for Diana's brother, Earl Spencer, said he was confident the fund would quickly resolve the problem.
Lucy Gampell, director of Action for Prisoners' Families, said it would be "catastrophic" if its grant - a quarter of its total budget - was lost.
The mint is claiming punitive and exemplary damages following the fund's legal action against it.
The BBC's Nick Bryant in Philadelphia says the suit could also constitute a warning to other charitable trusts not to try to monopolise the cache of their namesakes.
The fund and Diana's estate had argued the mint's production of a "limited edition commemorative plate" soon after her death in 1997 violated their "exclusive
rights" to her name and image.
The action was thrown out after being labelled "groundless and unreasonable", leaving the fund with a £4m legal bill.
The mint claims the action was an attempt to damage its "sales efforts, embarrass it and sully its reputation".