Enterprising farmers have been shut out of seeking LEADER funding for food projects.
The shock announcement by the Department of Community, Equality and Gaeltacht Affairs last week means that no further assessments or approvals are allowed for on-farm food projects for the foreseeable future.
Staff in LEADER companies have even been ordered to revoke letters of offer that have not yet been signed off.
"In cases where the letter of offer has been issued but has not been signed by the promoter, Local Area Groups should contact the promoter immediately and revoke the letter of offer," a letter from the Department of Community, Equality and Gaeltacht Affairs advised.
The freeze on funding arises from an EU review of how Ireland is administering its Rural Development Programme.
The communication from the Department of Community, Equality and Gaeltacht Affairs states that the clampdown on grants applies only to "projects involving a farmer/member of a farm family which in any way involves food preparation, production or processing".
The communication stated that this included projects relating to meat, vegetables, cheese, ice-cream and crisps.
"These projects could be under measure 311 Diversification into non-agricultural activities, measure 312 Business creation and development or measure 313 Encouragement of tourism activities," the letter continued.
"It sounds like the EU is catching up on an Irish solution to an Irish problem. I always thought that Ireland should've been much more transparent with how it was managing its [Rural Development] funding. You would wonder what people were thinking when they were negotiating this for us," said Irish Rural Link CEO Seamus Boland.
Mr Boland insisted the move would hit younger generations in rural Ireland the hardest.
"That's the generation where the enterprise is coming from," Mr Boland said.
The IFA's Tom Turley said that it was up to the Department of Community, Equality and Gaeltacht Affairs, and the Department of Agriculture, to resolve the issue as fast as possible.
"No project should be held up at a time when we need jobs more than ever," Mr Turley said.
Officials in both departments said that they were responding to the queries raised by the Commission and hoped to have the issue resolved "shortly".
They said they had implemented the freeze on funding as "a precautionary measure" until these issues have been resolved.