Australia and Papua New Guinea are understood to have reached a stalemate over how to resurrect the derailed multi-million dollar Enhanced Cooperation Programme.
The aid programme was thrown into doubt in mid May by a Supreme Court decision that the immunity from prosecution granted to Australians working in PNG under the programme was unconstitutional.
That led Australia to pull out some 160 police working in PNG under the programme.
It left officials working in the justice, immigration, forestry, taxation and other areas, but their continued presence in PNG is in doubt, sources say, as the impasse deepens.
Officials from both sides have met once and gone away to examine options, but Australia is not backing down on its demand that its people in PNG under the ECP be given immunity from prosecution.
There is a substantial body of opinion in PNG that this is not necessary or desirable.
Sources say the PNG Government remains firm that it cannot see how immunity can be granted without breaching the Constitution, which it knows it would lack support to change over this issue.