The decision came as a Pakistani newspaper reported allegations of corruption by the local puppet theatre working on the initiative.
The organisation in question is the Rafi Peer Theater Workshop, a group in the city of Lahore that jointly developed the show with Sesame Workshop, the creator of the American series.
The show, which includes Elmo and a host of new Pakistani characters, first aired at the end of last year and was supposed to run for at least three series.
The US hoped it would improve education in a country where one-third of primary school-age children are not in class. It was also meant to increase tolerance at a time when the influence of radical views is growing.
US Embassy spokesman Robert Raines said the US Agency for International Development terminated funding for the programme, but declined to provide further details.
The Pakistan Today newspaper reported on Tuesday that the cause was "severe" financial irregularities at Rafi Peer, citing unnamed sources close to the project.
Officials at Rafi Peer allegedly used the US money to pay off old debts and awarded lucrative contracts to relatives, the sources claimed.
Faizaan Peerzada, the chief operating officer of Rafi Peer and one of several family members who run the organisation, denied the corruption allegations.
He said the US ended its participation after providing $10 million because of the lack of additional available funds.
"Rafi Peer is proud of its association with the project and of the quality of children's educational television programming created within Pakistan as a result," the group said in a statement sent to The Associated Press.
If the corruption allegations prove true, it would be an embarrassment for the multibillion-dollar US aid programme in Pakistan, which some analysts have criticised for lacking focus and not achieving results.
Rafi Peer plans to seek alternative sources of funding to continue producing the local version of "Sesame Street," which is called "Sim Sim Hamara," or "Our Sim Sim." The original goal was to reach 3 million children, 1 million of whom are out of school.
The show is led by a vivacious 6-year-old girl named Rani who loves cricket and traditional Pakistani music. Her sidekick, Munna, is a 5-year-old boy obsessed with numbers and banging away on Pakistani bongo drums, or tabla. Other new characters include Baily, a kindly donkey who loves to sing, and Haseen O Jameel, a vain crocodile who lives at the bottom of a well.
The action revolves around a mock-up of a Pakistani town, complete with houses, a school and Baaji's dhaba, a small shop and restaurant found in many places in the country. The town also includes a large Banyan tree, known as the wisdom tree in South Asia, in the shade of which the children often play.
Each episode is based around a word and a number, like the US version, and tackles general themes like friendship, respect and valuing diversity. This last theme is particularly important in Pakistan, where Islamist extremists often target minority religious sects and others who disagree with their views.
The American version of "Sesame Street" first aired in 1969, and the US government has worked with the company since then to produce shows in about 20 foreign countries, including Muslim nations like Bangladesh and Indonesia.
Sesame Workshop, the creator of the American series, said it was dismayed to hear about the corruption allegations against Rafi Peer.
"It is our hope that the achievements of Sim Sim Hamara, and the gains we have made in the lives of children in Pakistan, will carry on," it said in a statement.