Denmark had tied a fifth of its $15.8 million budget support for the 2007/2008 fiscal year to an anti-corruption bill that was due to be handed to parliament last month, but was delayed.
"From my perspective, it is a contract which has been broken," said Carsten Pedersen, Denmark's envoy to Tanzania.
"If Tanzania met this target, they would get this money. They are, of course, not happy about it," he told Reuters by telephone from the country's commercial capital Dar es Salaam.
Tanzanian President Jakaya Kikwete put fighting corruption among his top priorities when he took power almost a year ago.
Donors said a key step would be a new law making it easier to punish corrupt individuals while protecting whistle blowers.
Philip Marmo, state minister for good governance in Kikwete's office, said the bill's presentation had only been delayed while the government sought the views of the public.
"We have procedures to follow," he told Reuters. "It would be unconstitutional to skip some of those laid down procedures to bring a very important piece of legislation like this one."
He said the cabinet was now studying the proposed law, which would be presented to the next parliament session in February.