Many analysts believe Pakistan is reluctant to target the Haqqanis and other Afghan militants based on its soil because they could be useful allies in Afghanistan after foreign forces withdraw, especially in countering the influence of India.
Pakistan lashed out at Panetta on Saturday and denied the country was providing safe havens for militants.
Panetta "is oversimplifying some of the very complex issues we are dealing with in our efforts against extremism and terrorism," the Foreign Ministry said. "We strongly believe that such statements are misplaced and unhelpful in bringing about peace and stability in the region."
A senior U.S. official described the relationship as "the worst it has ever been."
"This is from Washington's point of view and from Pakistan's point of view, and even among the real well-wishers on both sides who are appalled and befuddled that we can't get past all of this and move beyond," said the official, speaking on condition of anonymity because of the sensitivity of the issue.
After years of frosty relations caused by Pakistan's nuclear weapons program, Washington and Islamabad were thrust together on Sept. 11, 2001, when al-Qaida attacked New York and Washington. The U.S. demanded Pakistan support the war against bin Laden and his Taliban hosts in Afghanistan. The U.S. directed billions of dollars in aid to Pakistan and sought to convince Islamabad it was not simply interested in a "transactional" relationship based on counterterrorism cooperation, but wanted a long-term strategic partnership.
U.S. officials have largely abandoned that argument over the past 18 months as the relationship has suffered repeated crises.
"Because of the toxic atmosphere on both sides, the two countries cannot even work in a transactional way," said Lodhi, the former Pakistani ambassador.
In January 2011, a CIA contractor sparked outrage when he shot to death two Pakistanis in the city of Lahore who he claimed were trying to rob him. Anger over the incident was still simmering when the U.S. killed bin Laden in May.
In November, American airstrikes killed 24 Pakistani troops at two Afghan border posts. The U.S. has said it was an accident, but the Pakistani army claims it was deliberate.
Pakistan retaliated by kicking the U.S. out of a base used by American drones and closing its border to NATO supplies meant for troops in Afghanistan. Negotiations to reopen the route have been hampered by Islamabad's demand for much higher transit fees and Washington's refusal to apologize for the deaths of the Pakistani troops.
The U.S. has attempted to bridge the difference over money by offering to repave highways used by the supply trucks, said a U.S. official, speaking on condition of anonymity because of the sensitivity of the issue.
But Pakistani officials have made clear the route will not reopen without some kind of apology. The U.S. has expressed its regret over the incident but has refused to apologize for fear it could open the Obama administration up to criticism by Republicans upset with Pakistan.
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