"When our last release of budget support fell due in March we were concerned by several aspects of the transition, including that insufficient progress had been made towards establishing a fair basis for a multi-party system," the British High Commission in the Ugandan capital, Kampala, said in a statement.
"We therefore decided then to withhold £5 million out of the total of £40 million ($77 million) for the financial year," the statement added.
The High Commission said Britain and Uganda had agreed that the budget support arrangement would be linked to reforms, including improvements in macro-economic management and governance.
Uganda’s President Yoweri Museveni came to power through a military coup in 1986, and banned political parties on the grounds that they had, in the past, divided the population along ethnic and religious lines. A referendum is planned to decide whether to allow multi-party democracy ahead of elections in 2006.
Among the benchmarks for legitimate transition, the statement said, were "the establishment of the rules for multiparty competition, and the capacity to implement and monitor these, sufficiently far ahead of the 2006 elections".
The statement said Britain and Uganda had also agreed on the separation of the organs of state from the Movement; unhindered and inclusive debate on political and constitutional reform, including freedom of press and association; and respect for human rights.
The absence of significant physical intimidation or financial manipulation of the process of change, respect for the rule of law and an independent judiciary were other stipulations of the bi-lateral agreement.
Uganda’s minister of information, James Nsaba Buturo, on Friday told IRIN: "It is their money. They took the decision to give us the money and they have taken the decision to withhold it."
"What we have to do is to bridge the gap because this was not anticipated when we were making the budget," Buturo said, adding that Britain’s action was a lesson to Uganda to be less dependent on foreign aid.
"We shall now prioritise our expenditure. They [the donors] have been indicating that this will come," Buturo added.
Buturo defended the government’s handling of the political transition, stating that it was transparent.
"Ultimately, it is the Ugandan people who have to either be happy or not, and as far as we are concerned, the people of Uganda are happy with the progress," he said.
Britain’s decision was welcomed by Uganda’s opposition groups, who have long accused Museveni’s government of manipulating of the transition process, and of intimidating opponents of the government.
The spokesman for the opposition Forum for Democratic Change, Wafula Oguttu, told IRIN on Friday that his party had written to donors asking them to freeze all aid to Uganda except money earmarked for humanitarian support.
"The government is mismanaging the political transition, and on top of that, is diverting donor funds intended for Uganda’s development to other causes," Oguttu said.
"Future disbursement of aid to Uganda will depend on Britain’s assessment in September of the progress made in the country's transition," an embassy official told IRIN on Friday.