The United States has demanded that the Marshall Islands pay back 800,000 US dollars given to it to build a school that the government now says can't go ahead.
The money was given under the Compact of Free Association after the government said landowners had approved construction of the school on Majuro.
It was then spent on design work, but last month, the US was told that the school couldn't go ahead because the documentation didn't actually give authority for land use.
Our correspondent, Giff Johnson, says Washington is now saying that if the money isn't paid back by July, it may withhold other payments.
"There's monthly grants, and [the] infrastructure grant annually is around 12 million dollars, so clearly it could be deducted from a future payment."
Giff Johnson says the Marshall Islands is disputing this, saying there was no intent to do anything improper and that there are still plans to build the school elsewhere.