WASHINGTON: The United States has put all bilateral contacts with Pakistan on hold until Islamabad releases an employee of the its consulate in Lahore, arrested for shooting down two men, diplomatic sources told Dawn.

The sources said that the dispute could affect three major events planned this year: President Asif Ali Zardari’s visit to Washington, the next round of US-Pakistan strategic dialogue and trilateral talks involving Pakistan, Afghanistan and the United States.

Last week, Foreign Minister Shah Mehmood Qureshi postponed a visit to Munich, Germany, to attend an international security conference after US officials informed Islamabad that their Secretary of State Hillary Clinton might not be able to meet him because of this dispute.

But the events planned for this year are of far greater importance than the conference in Munich.

Delay in Mr Zardari’s visit, planned next month, “would send wrong signals around the world and would also embarrass him at home”, said one diplomatic source.

Similarly, “delaying the strategic dialogue would have serious implications”, he added.

The sources believe that while the Americans are unlikely to postpone the trilateral talks, “the US decision to postpone all bilateral contacts can put Pakistan at a great disadvantage during the negotiations”.

They also want that the US Congress is currently considering budget proposals for the next fiscal year and the diplomatic row could affect $1.5 billion of annual assistance for Pakistan as well.

Last week, it seemed that the Pakistani government had made up its mind to release the American, Raymond Davis, but on Sunday the wife of one of his victims committed suicide, which further complicated the matter.

Investigations by Dawn confirm that Mr Davis worked for a private security firm before he went to Pakistan but he does have a diplomatic passport.

He submitted the same passport to the Pakistan Embassy in Washington which gave him a work, but not a diplomatic visa.

The Pakistanis stress that the US Embassy was slow in demanding diplomatic immunity for Mr Davis and was quiet on this matter for 48 hours, creating doubts about his status.

“Despite such doubts, Pakistan has agreed in principle to grant diplomatic immunity to Mr Davis and send him back to the US,” said a senior diplomatic source in Washington.

“But the government is scared of political repercussions, particularly after the suicide,” the source added.

A Pakistan diplomatic source said all sort of interactions could be affected, including US assistance to Pakistan, one of the largest non-Nato recipients of American military aid.

“They tell us they'll interact with us once this issue is resolved,” the source said. The controversy could even effect a $7.5-billion, five-year civilian aid package or official visits or meetings between the sometimes friends, sometimes foes.