Egypt on Tuesday called for a suspension of meetings with Ethiopia on Addis Ababa's massive dam construction project on the Nile.
Sudan threatened to withdraw from the talks saying Ethiopia insisted on linking them to renegotiating a deal on sharing the waters of the Blue Nile.
Sudan's water and irrigation minister, Yasser Abbas, said he received a letter from his Ethiopian counterpart who proposed "the deal under discussion be limited to filling up the dam and any deal concerning its management be linked to the question of sharing Blue Nile waters".
Egypt and Sudan invoke a "historic right" over the river guaranteed by treaties concluded in 1929 and 1959.
But Ethiopia uses a treaty signed in 2010 by six riverside countries and boycotted by Egypt and Sudan authorising irrigation projects and dams on the river.
"This is a significant development and a change in the Ethiopian position," the Sudanese minister said.
"This new Ethiopian position threatens the negotiations under the aegis of the African Union, and Sudan will not participate in negotiations which include the subject of sharing Blue Nile waters," he said.
"Sudan will not allow the lives of 20 million citizens who live along the Blue Nile to be tied to an agreement on sharing the water of this river," the minister said.
The call came after a meeting of technical and legal committees from the three countries aimed at pushing for a deal on the filling and operation of the Grand Ethiopian Renaissance Dam (GERD).
The meeting was also attended by observers from the United States and the European Union as well as experts from the African Union.
The Egyptian water ministry, in a statement, said Ethiopia put forward a draft proposal that lacked regulations on the operation of the dam or any legal obligations.
Addis Ababa's draft also lacked a legal mechanism for settling disputes, according to the Egyptian ministry.
"Egypt and Sudan demanded meetings be suspended for internal consultations on the Ethiopian proposal, which contravenes what was agreed upon during the African Union summit," it said.
Leaders from the three countries agreed at the July 21 summit to press ahead with negotiations.
GERD has been a source of tension in the Nile River basin ever since Ethiopia broke ground on the project in 2011.
Egypt and Sudan view the dam as a threat to vital water supplies, while Ethiopia considers it crucial for its electrification and development.