The Chinese contractor has stopped work on various sections of the project after the authorities failed to meet a deadline for the release of the funds, The News daily quoted its sources as saying.
The report described the suspension of work as a "big blow" to the project.
The contractor has informed the Power Ministry about its inability to continue work on the 969 MW project beyond August 10, the sources said.
"It is indeed a setback for the project," said an unnamed official.
The Finance Ministry is setting up a review committee for the release of funds, the official said.
Any delay in releasing funds will virtually defeat the purpose of inducting sophisticated tunnel boring machines (TBMs) that were inaugurated by Pakistan Prime Minister Raja Pervez Ashraf during a visit to the site of the project on August 6, officials said.
The TBMs were acquired to speed up work on the main diversion tunnels and to reduce the construction period by 18 months, resulting in estimated savings of over Rs 60 billion.
Pakistan wants to complete the project before India's Kishanganga hydropower plant so that it can gain priority access to the waters of the Neelum river, a major tributary of the Jhelum river.
Ashraf formally inaugurated two German-made TBMs on August 6 following their installation at the site of the Neelum-Jhelum hydropower project.
The project was underway with assistance from Chinese and other international companies and scheduled to be completed in 2016.
The two TBMs were purchased at a cost of about Rs 19.5 billion and Neelum-Jhelum project chief executive officer Lt Gen Muhammad Zubair said the cost of the machines would be recovered in three years.
Zubair said about 40 percent of the work had been completed though the project has been facing a shortage of funds for the past two months due to delay in the release of money from the Finance Ministry.
Islamabad: Work on the Neelum-Jhelum hydropower plant in Pakistan-occupied Kashmir has been suspended by a Chinese contractor after the authorities failed to release Rs 7.8 billion for the project, a media report said on Saturday.
First Published: Saturday, August 11, 2012, 16:18