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Nepal's parliament began debating a U.S. infrastructure grant of $500 million which, critics say, undermines the Himalayan nation's sovereignty as protesters opposed to the proposed funds clashed with police, officials and witnesses said on Sunday.

The Millennium Challenge Corporation (MCC), a U.S. government aid agency, agreed in 2017 to provide the aid in a grant to fund an electricity transmission line and road improvement project.

The aid does not need to be repaid and Washington says it comes without conditions.

But opponents, many wary of U.S. influence, say the aid would undermine Nepal's laws and sovereignty, as it would not have sufficient control over the projects.

Major political parties, including those in the ruling coalition, are divided over whether to accept the grant.

"The agreement will bring Nepal under the security umbrella of the United States and should be rejected," Bhim Rawal, a lawmaker of the opposition Nepal Communist Party (Unified Marxist-Leninist), told parliament.

Supporters of the grant believe there is nothing to object to.

"It will promote the interest and welfare of the country and should be accepted," Mahant Thakur, a deputy of the Loktantrick Samajwadi Party, said during the debate.

Hundreds of protesters opposed to the aid clashed with police who used teargas, water cannon and rattan sticks to disperse them and stop them marching on parliament.

Lawmakers are expected to vote on the grant later on Sunday. (reuters)