The Millennium Challenge Corporation (MCC) said the vote “was neither inclusive nor representative”.
The October election for president of the semi-autonomous archipelago was cancelled half way through the count.
The opposition boycotted the re-run in March which incumbent President Mohamed Ali Shein won with 91% of the vote.
The money was intended to be spent on improving the availability and reliability of electricity in rural areas.
This was in addition to $700m the US had given to the Tanzanian government in 2008 to improve transport, energy and water.
Last year, the Africa Development Bank said that as few as 11% of people in rural Tanzania were connected to electricity, and noted that women were disproportionately affected as they tended to be responsible for getting household food, fuel and water.
Minister of Foreign Affairs Augustine Mahiga told the BBC that he was surprised that the MCC had not taken into account the huge strides Tanzania had taken in democracy.
It was people in villages with no electricity who would suffer most from their cut in funds, he added.
In the statement announcing the cancellation, the MCC said the Tanzanian government had gone ahead with the re-run of the election “despite the repeated concerns of the US government and the international community”.
The opposition Civic United Front (CUF) said the annulment was because it had won, but the electoral commission said there had been widespread fraud.
The MCC also said Tanzania’s government had failed to guarantee that the newly passed Cybercrimes Act “would not be used to limit freedom of expression and association, in light of arrests made during the elections”.
One of the people arrested ahead of the election was the CUF’s director of mass communication and publicity, Hamad Masoud Hamad, although it is unclear what he was charged with.
The Cybercrimes Act makes spreading lies, sedition and pornographic material online illegal.
Critics say it is intended to silence voice critical of the government and ruling party.
Mr Mahiga said the act was necessary to fight terrorism.
This is a blow to President John Magufuli’s efforts on development as he was expecting this money to bring electricity to more people.
However, he has used this as opportunity to criticise foreign aid.
“We need to stand on our own. Work hard so that Tanzanians can get rid of donor dependence,” he told a rally on Tuesday.
President Magufuli has won praise for his anti-corruption crusade since coming to office in November.
Whenever he talks about this, he points out that Tanzania is capable of running projects without any foreign aid if only corruption could be eliminated and public funds used for their intended purposes.