President Evo Morales has announced he is suspending "indefinitely" the operations of the US Drug Enforcement Administration in Bolivia.
Mr Morales accused the agency of having encouraged anti-government protests in the country in September.
He did not say whether its staff would be asked to leave the country, as coca-growers have been pressing him to do.
Bolivia's first indigenous president first came to national prominence as a leader of the country's coca farmers.
Relations between Bolivia and the US have been strained since Evo Morales won presidential elections in January 2006.
Coca is the raw material used in the production of cocaine and is widely grown in Bolivia.
The country is a major producer of cocaine, but millions of Bolivians poorest people also chew coca leaves as part of their daily routine. Many believe the leaf offers health benefits.
"From today all the activities of the US DEA are suspended indefinitely," the Bolivian leader said in the coca-growing region of Chimore, in the central province of Chapare.
"Personnel from the DEA supported activities of the unsuccessful coup d'etat in Bolivia," he added, referring to the unrest in September which left 19 people dead.
"We have the obligation to defend the dignity and sovereignty of the Bolivian people."
US officials have denied any wrongdoing.
In recent months, a string of tit-for-tat expulsions of diplomats and agencies increased tensions between both countries, the BBC's Andres Schipani reports from Bolivia.
Bolivia's government expelled the US ambassador.
Washington retaliated by expelling its Bolivian counterpart, while last month President George W Bush himself put the Andean country on an anti-narcotics blacklist that cuts trade preferences.
Making his announcement, Mr Morales also declared that his government had eradicated more than 5,000 hectares (12,300 acres) of illegally planted coca.