The official told CBS News' Farhan Bokhari the Bush administration is demanding a comprehensive revamp of Pakistan's powerful counter-espionage agency, the Inter-Services Intelligence (ISI), before Washington will resume full intelligence cooperation with its valuable Asian ally.
In the latest secret operation, Midhat Mursi al-Sayid Umar, also known as Abu Khabab al-Masri - a leading al Qaeda chemical and biological weapons expert,early Monday morning at a remote location in Pakistan's Waziristan region, which borders Afghanistan.
"Information of this attack was shared very late with Pakistan. This was a case where the U.S. did not want to alert the Pakistanis in advance because of concerns over information leaks," said the European official, whose country has contributed troops to the NATO coalition force in Afghanistan. He spoke to CBS News on condition of anonymity due to the sensitivity of the information.
The revelation on the Bush administration's toughening stance on its long-time ally in the war against Islamic extremism came as Pakistani officials angrily denied a newspaper report that its intelligence service helped plan a bombing of India's embassy in Kabul that killed at least 41 people.
The New York Times reported for Friday's editions that American intelligence agencies have concluded that members of the ISI were involved in the July 7 attack in the Afghan capital.
The report cited unnamed U.S. government officials. It said the conclusion was based on intercepted communications between Pakistani intelligence officers and militants who carried out the attack.
Pakistan's Foreign Ministry spokesman Mohammed Sadiq described the report as "total rubbish." He said there was no evidence of ISI involvement.
"The foreign newspapers keep writing such things against ISI, and we reject these allegations," he said by telephone from a summit of south Asian leaders in Sri Lanka.
But the European defence official told CBS News the U.S. was seeking comprehensive changes in the ISI's structure. "What the U.S. wants is a revamp, especially among the ISI's units which deal with areas along the Afghan border. Additionally, the U.S. wants to see new structures in place for closer oversight on people in the field. Basically, within the ISI, there has to be a strong internal affairs unit, of a kind," he said.
One senior Pakistani official, who also spoke to Bokhari on condition of anonymity, said the U.S. military campaign in Afghanistan "is failing, the militants are gaining ground. The U.S. and others are just pointing fingers towards others."
Afghanistan has long accused the ISI of backing the Taliban-led insurgency wracking the country, despite Pakistan's support of the U.S.-led war on terror. The embassy bombing was the deadliest in Kabul since the 2001 ouster of the Islamist regime in a U.S. invasion.
Western diplomats based in Islamabad told CBS News last week that the cross-border tension presents a major dilemma for U.S. policymakers, as the Bush administration tries to get the two countries to cooperate in the war on terror.
In the seven years since the U.S. toppled the Taliban regime and installed Afghan President Hamid Karzai Karzai as its frontline ally, American officials have worked hard to bring Afghanistan and Pakistan closer to each other, without much success.
While Pakistani leaders have said repeatedly they want closer ties with their neighbor, their claims have been questioned due to growing activity by Islamic militants linked to al Qaeda and the Taliban, who use Pakistan's tribal areas along the border as staging grounds to launch attacks on Afghan and Western troops in Afghanistan.
Last week, India accused "elements of Pakistan" of being behind the embassy blast and said it has put the four-year-old peace process between historic rivals India and Pakistan - who have fought three wars since they won independence from Britain 60 years ago - "under stress."
The latest accusations came as south Asian leaders, including those from India, Afghanistan and Pakistan, gathered for the meeting on regional cooperation in Sri Lanka.
Sri Lankan Foreign Minister Rohitha Bogollagama said Thursday the south Asian countries were expected to sign a pact to work together to fight terrorism and to freeze funds used for terror attacks.