An international aid agency froze its donations to Zimbabwe yesterday after President Mugabe's central bank was found to have pilfered £4.5 million from funds meant to help millions of seriously ill people.

The missing money was part of a £65million grant from the Global Fund to Fight Aids, Tuberculosis and Malaria, one of the world's largest private organisations dedicated to helping poor countries to combat disease.

An audit by the fund last month discovered that its grant, deposited in the Reserve Bank of Zimbabwe, had disappeared. The money should have been used to train 50,000 people and buy drugs for a complex national anti-malaria campaign. Instead, only 495 people have been trained.

Aid agency officials said the loss of the money was a severe setback in the fight against a frequently fatal disease that affects 2.7 million Zimbabweans.

Global Fund officials cited internal correspondence from Zimbabwe's Central Bank in which Gideon Gono, the bank governor, stated that the money was used “for other national priorities”. Mr Gono refused to meet the audit team while it was in the country to explain the shortfall. “It's theft, plain and simple,” said a Western diplomatic source.

The global fund has now suspended its current operation in Zimbabwe and will not make the 2009 payment for £320million. At its meeting in Delhi yesterday, the fund's board withdrew the allocation. “We will not sign any new grants, even if the fund board approves future grants to Zimbabwe, unless that money is fully recovered,” said Michel Kazatchkine, its executive director.

The brazenness of the “diversion” of the money has shocked health workers in Zimbabwe. The country's economic crisis has been accompanied by famine, one of the highest rates of Aids infection in the world and rampant TB and malaria. The country also faces a potential epidemic of cholera as urban townships wallow in rivers of raw sewage and mountains of uncollected garbage amid the collapsing infrastructure.

Mr Mugabe's Health Minister, David Parirenyatwa, tacitly admitted that the money had been misappropriated when he promised that it would be paid back, without explaining what had happened to it. He also appeared to be asking for extra time to pay, when he said repayment would be “in the next seven days”.

Like all other aid agencies, the global fund deposited the cash in foreign currency accounts in commercial banks, but transferred into the custody of the central bank. The institution is “technically bankrupt”, according to the International Monetary Fund, and has a publicly acknowledged policy of printing money to pay for state expenditure.

Shortly before elections in March, the accounts of the aid agencies and thousands of private businesses were systematically looted by the central bank.

Officials and businessmen trying to withdraw their foreign currency were politely told the bank was “unable to pay at this time”, but that the cash would be released later.

“To my knowledge, not one has been repaid,” said a senior commercial bank executive.

Since then, the Government has spent a fortune importing tractors, combine harvesters, limousines, plasma televisions and a range of other expensive items. These were handed out to Mr Mugabe's cronies, with cash used to bribe voters.

“We have never refused to acknowledge the liability,” Mr Gono said yesterday. “Only cheap minds would go as far as to suggest that the money was used to buy tractors and TV sets.”

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