The UK has ended unconditional aid to the Ethiopian government over concerns about its commitment to human rights.
All aid will now be earmarked for specific projects, UK Development Minister Hilary Benn announced on a visit to Ethiopia.
Ethiopia Prime Minister Meles Zenawi was once seen as a key British ally.
The United Nations estimates 1.75m Ethiopians in the south are in desperate need of food aid and has issued an urgent appeal for help.
Mr Benn did not disclose how much money would be withheld, but it is thought to be about £50m ($88m).
The details of the new funding mechanisms have not been released.
He said there had been a "breach of trust" since more than 80 people were killed in opposition protests following disputed elections.
Mass arrests
Mr Benn maintained that Britain was still "fully committed to supporting the people of Ethiopia in their fight against poverty".
But he said he was seriously concerned about "the detention of and very serious charges faced by the opposition, the media and members of civil society".
Some 100 opposition leaders, journalists and aid workers remain in prison on charges ranging from treason to "genocide" in connection with the unrest.
"Concerns have been raised with me about the continuing clashes between students and security forces in schools and colleges across the country," he told reporters in Addis Ababa.
Last May's polls were the most closely contested in Ethiopian history, and resulted in the opposition winning more than 100 seats in parliament.
But the opposition believed they had been cheated of victory, and took to the streets. The clashes left many dead, and Mr Meles accused the opposition of attempting to overthrow his government.
Western governments tried to bring the parties together, but with limited success.
In November, the British ambassador to Ethiopia, Bob Dewar, put out a strong statement on behalf of the European Union and the United States.
It called for respect for human rights, an end to mass arrests, the lifting of restrictions on the opposition, and the freeing of political detainees.
Until last year's elections, Mr Meles had been praised for opening up political debate and for liberalising the economy.
He was even invited to be a member of the British prime minister's Commission for Africa.
The government has blamed its opponents for the unrest and violence.
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