UPDATE 2-UK blocks aid to Rwanda over Congo rebel claims
* Rwanda says decision not constructive
* Britain cites "credible" reports over Rwanda's involvement
* M23's rebels pose major challenge to Kinshasa government (Adds context on UK aid, UK government quote)
By Natalie Huet and Jenny Clover
LONDON/KIGALI, Nov 30 (Reuters) - Britain said on Friday it was withholding 21 million pounds ($34 million) of aid which was about to be paid to Rwanda because of "credible" reports the government in Kigali is supporting rebels in neighbouring Democratic Republic of Congo (DRC).
Britain, one of Rwanda's largest donors, is the latest Western ally to freeze aid after a United Nations report said Rwanda was behind an eight-month-old rebellion responsible for the worst fighting in eastern Congo for years.
The Kigali government said it was disappointed with the move and that blaming Rwanda for the latest bout of violence in the region might suit short-term political gains but would not end the conflict.
"This action harms Rwanda and does nothing to help the DRC," Rwanda's foreign minister Louise Mushikiwabo said.
The U.N. report accused Rwanda of coordinating the creation of the rebel movement as well as military operations - charges Rwanda has denied.
However, British International Development Secretary Justine Greening said Rwanda had breached the principles underpinning their bilateral aid relationship. She said the 21 million pounds of support due in December for the government's general budget would not be paid.
"The government has already set out its concerns over credible and compelling reports of Rwandan involvement with M23 in DRC," Greening said.
The M23 rebellion poses the biggest threat to Congolese President Joseph Kabila's leadership in years and threatens to develop into all-out war after the rebels seized the eastern city of Goma 10 days ago.
M23 commanders said this week they would vacate North Kivu's provincial capital. On Friday, however, the reluctance of some rank and file fighters to withdraw from the border city was complicating a deal brokered with regional governments.
Britain had already frozen budget support to Rwanda in July, after a U.N. interim report accused officials in Rwanda of backing M23.
The findings prompted other Western partners, including the European Union and the United States, to suspend aid to Rwanda, which relies on such support for about 40 percent of its budget.
However, Britain's former international development secretary Andrew Mitchell unblocked part of the cash in September, praising the Rwandan state for what he said were its constructive efforts to solve the conflict.
Britain is the biggest bilateral donor to Rwanda's general budget, and is the country's second largest bilateral donor of aid overall after the United States.
Britain's Department for International Development (DFID) planned to spend 75 million pounds this financial year on total bilateral aid to Rwanda and is now looking at alternatives to general budget support, for instance aid provided through sector-specific programmes or NGOs.
"Justine Greening will look at the issue of general budget support in the light of progress made by the Government of Rwanda on the partnership principles. She will consider options on how the UK can continue to help protect the poorest in Rwanda," a DFID spokesman said. (Editing by Angus MacSwan and Greg Mahlich)