The bill, now pending a Senate vote, calls for only 40% of Pakistan Counterinsurgency Funds to be released - the rest of the amount can only be released after the Department of Defense issues a report stating that Pakistan has made progress in stemming the flow of ammonium nitrate and IEDs into Afghanistan.
The bill also slaps harsh new sanctions on Iran, and embraces indefinite detention of suspected terrorists.
The House and Senate committee worked to change the language of the bill, after which the White House announced on Wednesday that it would not be vetoing the bill, as it has previously said it would.
The measure would freeze roughly $700 million in aid to Pakistan pending assurances that Islamabad has taken steps to thwart militants who use improvised explosive devices (IEDs) against US-led forces in Afghanistan.
"We've had some shaky relations lately with Pakistan. We need them, they need us," said House Armed Services Committee Chairman Buck McKeon, a Republican.
"But one of the things that has bothered me the most in this war in Afghanistan is the loss of life and limb to IEDs."
Bill to keep al Qaeda linked militants in military custody
The legislation notably requires that al Qaeda fighters who plot or carry out attacks on US targets be held in military, not civilian, custody, subject to a presidential waiver.
The measure exempts US citizens from that fate, but leaves it to the US Supreme Court or future presidents to decide whether US nationals who sign on with al Qaeda or affiliated groups may be held indefinitely without trial.
Obama had warned he could reject the original proposal over the required military custody of some suspected extremists, as well as provisions he charged would short-circuit civilian trials for alleged terrorists.
"I just can't imagine that the president would veto this bill" given the changes made in the House-Senate compromise, Senate Armed Services Committee Chairman Carl Levin, a Democrat, said Monday.
Veteran Senator John McCain, the top Republican on Levin's panel, said the negotiators had met with key aides to Obama, including FBI Director Robert Mueller and top US Treasury Department officials.
"We feel that we were able to satisfy, we hope, most of their concerns," he said.
The lawmakers strengthened Obama's ability to waive parts of the detainee provisions and reaffirmed that the custody rules would not hamper ongoing criminal investigations by the FBI or other law enforcement organisations.
The measure forbids the transfer of Guantanamo Bay detainees to US soil and sharply restricts moving such prisoners to third countries - steps that critics of the facility say will make it much harder to close down.
More sanctions on Iran
The legislation adopts a tough new stance towards sanctions on Iran, which aim to cut off Tehran's central bank from the global financial system in a bid to force the Islamic republic to freeze its suspect nuclear program.
"It does curtail Iran's ability to buy and sell petroleum through its central bank and prevents foreign financial institutions that deal with the central bank of Iran from continuing their access to the US financial system," said McCain.
"They are going to pay a bigger and bigger price should they continue to move towards nuclear weapons," said Levin.
Arms for Georgia against Russia
The legislation also calls for closer military ties with Georgia, including the sale of weapons that McCain said would help the country, which fought a brief war with Russia in 2008, defend itself.
And it included a measure, authored by McCain and Levin, to crack down on counterfeit electronics making their way from China into the Pentagon's supply chain, hurting the reliability of high-priced US weapons programs.
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@betterwords: There is a wisdom which says "Be careful what you wish for"
No doubt the U.S. has the freedom to decide what they want to do with their budget. They should reshape their foreign policy and help the Pakistani civilians instead of seeking military cooperation with the military, which doesn't always have the best interests of the people at heart.
It is a blessing in disguise. As Part of the new terms of engagement, Pakistan should demand heavy tax on the use of Karachi port, road infrastructure and the movement of trucks. In addition to various taxes, Pakistan should demand compensation for war damages. I am sure the income in this way will be much more than the annual US aid.
This is a good sign. The more decrease in US aid, the more Pak would be come out of US influence.
United states borrows money from china and lend it to other countries. Pakistan should try to attract more chinese investment and stop this stigma of aid and charity. No country has ever prospered from aid.
That is good news for Pakistan, I wish for worst relations with US and we should get some time to learn what is meaning of hard work. Qaid-e-Azam said WORK , WORK and WORK and our leaders push country towards easy money BORROW , BORROW and BORROW. Or Aid,Aid and Aid.
I see good days ahead when people start to pay taxes and show their genuine loyalty toward country specially rich ones
Headlines change.....Day before yesterday they were freezing aid, yesterday there was no freezing, today they are moving towards freezing....
Thanks for letting us free, keep ur borrowed and stolen money.... Hurray
Congress is not "freezing aid" as the headline says, but adding conditions that require monitoring the supply of fertilizer which is used to make IEDs. Jingoistic wording only helps spread antipathy between the countries.