The Northern Ireland Office has said a grant of £1.2m (€1.76 million) of public money designated for a project aimed at moving the loyalist Ulster Defence Association away from violence will be witheld unless offending is reduced by the paramilitary organisation.
A spokesman for the NIO made the comments after a senior PSNI officer confirmed that the UDA is "still involved" in criminal activity a day after the British government announced details of the financial package.
"This is exactly the kind of criminality the initiative is intended to tackle.," the spokesman said.
"Continued funding is conditional on clear evidence that the levels of criminality are reducing," he said.
Detective Superintendent Esmond Adair's disclosure that there was significant evidence of the UDA being involved in extortion has increased pressure on Northern Ireland Secretary Peter Hain to abandon the planned grant for their advisors in the Ulster Political Research Group.
Alban McGuinness of the SDLP
Speaking on the BBC's Nolan Show, Mr Adair said there was "significant evidence the UDA are involved in extortion."
"We are very aware that extortion is rife in Northern Ireland. It is a vastly under-reported crime. We reckon that only 1-3% of extortion is actually reported to police."
The SDLPs Alban Maginness has said it would be indecent of the British to hand over public money to the UPRG following the latest security assessment.
He said: "Quite simply, this grant can't go ahead. This huge sum of money cannot be paid out to representatives of an organisation which has not decommissioned and is actively using its armed force to extort vast amounts of money.
"It cannot be paid to an organisation which confirmed on the very day the grant was announced that decommissioning is not even on its agenda.
"This direct rule bribe is indecent and it drags our whole political system into disrepute. It must be stopped immediately."
With the UDA directly blamed, Mr Maginness insisted the money offer had to be withdrawn. "Today we got direct confirmation from a senior police officer that the UDA is still engaged in extortion of businessmen," he said.
"In fact, we also got confirmation from a businessman that one victim is paying the UDA £92,000 on a convenient instalment plan of £700 a week.
"Only a tiny fraction of their extortion is being reported and the paramilitaries are so confident of avoiding detection that they are actually prepared to accept cheques."