The African Union will move a summit next month from Malawi if it keeps trying to block the attendance of President Omar Hassan al-Bashir of Sudan, who is wanted by the International Criminal Court.
Malawi last month asked the African Union to prevent Mr Bashir from taking part in the event, saying his visit would have "implications" for its economy.
Bashir is charged by the ICC with masterminding genocide and other atrocities during the Darfur conflict.
ICC chief prosecutor Luis Moreno-Ocampo said on Monday that countries that failed to detain him should have their aid cut.
About 40% of of Malawi's budget funding is from international donors.
"The African Union has written us a letter informing us that if we don't allow al-Bashir to come to Malawi, then they will move the summit to Addis Ababa in Ethiopia," Vice President Khumbo Kachale said on Friday.
African Union heads of state voted in 2009 not to cooperate with the ICC indictments, saying they would hamper efforts to end the conflicts in Sudan. They were also critical of the court for unfairly targeting African countries.
Mr Bashir has since visited Kenya and Chad.
The AU summit is scheduled for 9-16 July in Lilongwe. Sudan is on the agenda.
Mr Kachale said the cabinet had decided it was happy not to host the event.