The U.S. Agency for International Development (USAID) announced the suspension in a statement Thursday.
"After a country-wide review," it said, "USAID determined, in coordination with the Government of Ethiopia, that a widespread and coordinated campaign is diverting food assistance. We cannot move forward with distribution of food assistance until reforms are in place."
The suspension could affect millions of Ethiopians who depend on food aid amid recurring droughts, high inflation and the aftermath of a war in the northern Tigray region.
There was no immediate, direct response to the USAID statement from Ethiopian officials.
U.S. Secretary of State Antony Blinken met with Ethiopia's Deputy Prime Minister Demeke Mekonnen on Thursday on the sidelines of a meeting in Riyadh, Saudi Arabia. Afterward, the State Department said Blinken "welcomed the Ethiopian government's commitment to work together to conduct a full investigation into the diversion of U.S. food assistance and to hold accountable those found responsible."
According to The Washington Post, an investigation by USAID found that elements within the Ethiopian government were involved with the food diversion scheme.
The agency said that Ethiopian officials have been stealing donated food in order to feed soldiers and ex-combatants. It said officials have also sold flour on the open market to millers who re-exported it.
"Extensive monitoring indicates this diversion of donor-funded food assistance is a coordinated and criminal scheme, which has prevented life-saving assistance from reaching the most vulnerable," reported The Post, quoting a USAID document prepared for donors. "The scheme appears to be orchestrated by federal and regional Government of Ethiopia (GoE) entities, with military units across the country benefiting from humanitarian assistance."
The document said USAID investigators visited 63 flour mills in seven of Ethiopia's nine regions and found "significant diversion" across all seven regions. Food from the United States, Ukraine, Japan and France donated to the United Nations' World Food Program (WFP) has been stolen, the report said.
It called on all donors who sent food aid to check how it is being used.
Last month, USAID and the WFP halted food aid to the war-scarred Tigray region in northern Ethiopia. The agencies had discovered that shipments were being diverted to local markets.