The ongoing Afghan-US talks must reach an agreement if Washington is to maintain soldiers in Afghanistan after a NATO combat mission ends next year.
Karzai's decision to suspend the talks threatens to wreck US efforts to start a dialogue with the Taliban, which President Barack Obama had welcomed as an important step towards ending 12 years of war.
The prospect of peace received a further reality-check today when the Taliban claimed an audacious overnight rocket attack that killed four US troops at the largest US-led military base in Afghanistan.
"The president suspended the BSA (Bilateral Security Agreement) talks with the US this morning."
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He said the row centred on the Taliban office using the title "Islamic Emirate Of Afghanistan". That was the formal name of the Islamist movement's government from 1996 until it was toppled in 2001.
"The president is not happy with the name of the office. We oppose the title the 'Islamic Emirate of Afghanistan' because such a thing doesn't exist," Faizi said. "The US was aware of the president's stance."
Karzai has previously opposed direct Taliban-US talks, but had appeared to embrace the new office, which opened in Qatar yesterday.
He said he had ordered envoys to Qatar to try to negotiate with the Taliban as US officials said their own talks with the group could begin this week.
Karzai has stressed, however, that any dialogue would have to move from Doha, the capital of Qatar, to Afghanistan as soon as possible.