Something like open warfare has broken out between U.S. diplomats at the United Nations and top officials of the controversy-ridden United Nations Development Program, the U.N.’s flagship anti-poverty agency.

At bottom, the issue involves UNDP operations in communist North Korea, which the U.S. has charged were essentially hijacked by the government of dictator Kim Jong Il, and which the U.S. declared only last week were used to funnel millions of dollars in UNDP hard currency into North Korea’s secret nuclear weapons program.

But the struggle has taken on greater tension as it has increasingly pitted the American diplomats against Ad Melkert, a combative former Dutch politician who is now UNDP’s No. 2 official, known as the associate administrator. In a previous career incarnation, Melkert served as chairman of the ethics committee of the World Bank — and just two months ago, he played an important role in the forced resignation of World Bank President Paul Wolfowitz, a Bush Administration appointee.

Now the acerbic Melkert seems to be involved in another highly personal battle, as the UNDP official who has most vocally defended his organization as having done no wrong — but who also, it seems, has been issuing threats against the U.S. government in closed-door meetings over the North Korea affair.

The bare-knuckle dialogue broke into the open yesterday in the form of an extraordinary letter from Zalmay Khalilzad, the newly appointed U.S. ambassador to the U.N., to Kemal Dervis, the top official, or administrator, of UNDP.

In the letter, Khalilzad, formerly the U.S. ambassador to Afghanistan, declared himself “surprised and concerned” about what transpired in a meeting between Melkert and one of Khalilzad’s top subordinates, Ambassador Mark Wallace, in which the U.S. had been requesting additional information about alleged UNDP money transfers to the Kim regime. As Khalilzad put it, “Mr. Melkert suggested to Ambassador Wallace that UNDP viewed United States inquiry relating to such new information as justifying some kind of ‘retaliation’ against the Government of the United States.”

Emphasizing that the U.S. simply wanted “clarification” on the issue, Khalilzad hoped that UNDP would “avoid comments and action that are confrontational in nature.”

Requests by FOX News for a UNDP response to Khalilzad’s letter drew a terse response from the agency’s chief spokesman, David Morrison. Acknowledging that the agency had received the communication, Morrison declared that UNDP considers correspondence between its administrator and the head of the U.S. mission to be private.

"UNDP of course responds to all letters,” Morrison said.

Much more than private threats are involved in the exchange. Tempers have been rising since last January as the issue of UNDP’s alleged role in funneling hard currency to Kim Jong Il has become more complicated — and more important — with each passing week. The issue has now become central not only to the U.N. agency’s credibility but perhaps also to the question of how the North Korean despot kept his nuclear weapons program going despite increasingly tight international financial strictures on his regime.

New specific concerns were added last week in the two closed door meetings between the U.S. and the top UNDP officials mentioned in Khalilzad’s letter. According to leaked reports of the information, which was first given in congressional briefings, Khalilzad himself and Wallace asked Dervis and Melkert about specific payments funneled through UNDP of $2.7 million in “goods and equipment “ to a vendor with ties to Tanchon Commercial Bank, a North Korean organization that has been on U.S. Treasury sanctions lists since 2005 as helping to finance North Korean sales of ballistic missiles. The U.S. also said that UNDP had given some $7 million to North Korea's National Coordination Committee for UNDP (NCC) . Another $8 million of different U.N. agencies’ money also had gone to the North Korean regime — and about $2.8 million of that had in turn been used to buy houses in France, Britain and Canada.

The two U.S. diplomats largely asked the UNDP to turn over all of its own records regarding the transactions, and added specific information about years in which the payments allegedly occurred.

All of those accusations were vehemently denied in public by UNDP spokesman Morrison earlier this week, who said UNDP had given NCC no more than $175,000, and the money had been used ‘mainly for workshops.” He said that UNDP had, in fact, bought some equipment that could be construed as “dual use,” meaning of use in a weapons program, but that it was intended to help provide geographical information to boost agricultural production. He denied all other allegations of large-scale payments, and in a tone of frustration, declared that “we have no idea what documents the U.S. has” that lead to the accusations.

In fact, at the second meeting mentioned in Khalilzad’s letter (which Khalilzad did not attend), Melkert challenged Wallace to produce any and all documents backing up the U.S. accusations. It was in that meeting, with tempers obviously headed toward boiling, that Melkert made his alleged threat of “retaliation.”

The UNDP position that it would only respond to U.S. queries once documented evidence was turned over to it was termed “irresponsible” yesterday by a foreign diplomat at the U.N. who has followed the issue. The U.S. has asked only that UNDP turn over its own records on the transactions, and “this is the first time that an agency that is voluntarily funded by countries that are its members has said it will not look at its own records,” he said. The U.S. contributes some $100 million to UNDP’s budget.

The issue of what is in UNDP records has been the crux of the dispute with the U.S. since questions about UNDP’s role in helping Kim out of his cash squeeze were first raised by Ambassador Wallace last June. At that time, Wallace based most of his concerns on secret UNDP audits that are even kept confidential from countries like the U.S. that pay large amounts of UNDP funding and sit on the organization’s executive board. Wallace’s questions led to a preliminary investigation by a three-member team from UNDP’s external board of auditors, which reported two weeks ago that Wallace’s initial concerns were well grounded.

According to the auditors, UNDP had in fact made unauthorized hard currency payments to the North Korean government, not only for its own work in North Korea but for a variety of other U.N. agencies — at least $72 million in the period from 2002 to 2006.

UNDP also had hired 22 of its 31 staffers locally, in some cases in crucial oversight roles. The local employees were not only nominated by Kim’s dictatorship, but remained North Korean government employees while the UNDP paid them. The auditors also declared that many inspections of UNDP development projects in North Korea were only carried out under North Korean escort, and in some cases by the same local employees North Korea had provided. A substantial number of UNDP projects in North Korea in any given year were not inspected.

The North Korean government refused to cooperate with the audit, and did not let the investigators enter North Korea to inspect UNDP headquarters in Pyongyang or other operations around the country. On that account, the auditors declared, they still lacked much important information. Among other things, they had not even been able to view the check stubs from the checks that UNDP used to draw hard currency for its North Korean payments. The current U.S. position on the documents is that UNDP could easily ship them to New York City for inspection.

The UNDP’s position, strongly articulated by Melkert, is that UNDP did nothing wrong, and that the audit supports that contention, no matter what the actual language of the report seems to indicate. (In January 2007, however, UNDP ended both its hiring and hard currency payment practices in North Korea, and withdrew all its international employees last March when the Kim regime refused to accept the revised arrangement.)

At a meeting this week of UNDP’s 36-nation executive board, Melkert personally declared again that the audit “found no evidence that UNDP funding was diverted to the North Korean regime” and blamed such accusations on the press. He also said the auditors found “that the organization had controls in place to determine that its funds were used for development purposes.” Finally, Melkert declared that he and his boss, Kemal Dervis, “stand ready to act upon any serious allegation when substantiated,” another barb at the U.S. queries.

That drew an immediate rebuttal from U.S. Ambassador Richard Miller, the American diplomat who sits on the Executive Board. Miller declared himself “astounded and dismayed” by Melkert’s characterization of the audit report. He termed UNDP’s “glossy review” of the audit to be “disappointing” and declared that Melkert’s statement that he and his boss would take action when allegations were “substantiated” was “not good enough.” Miller added: “We look for them to be as offended by these audit report findings as we are.”

So far, that hasn’t happened. Instead, there is a standoff, with the U.S. demanding that UNDP open its own archives, and the international organization refusing.

Meanwhile, as Khalilzad’s letter makes undiplomatically clear, the lightning rod at the center of the controversy increasingly has a name: Ad Melkert.

After this story was posted, UNDP issued a strong denial of the "retaliation" charge. UNDP and U.S. officials were meeting again late Friday.

George Russell is executive editor of FOX News.