WASHINGTON, Oct 29 (Reuters) - The United States said on Monday it had confirmed that a man convicted over the al Qaeda bombing of the U.S. Navy ship Cole in 2000 was still in prison in Yemen despite reports of his release.

U.S. officials were troubled by reports last week that Jamal Badawi had been released from prison, saying he should remain in jail and putting on hold plans to give the country a $20.6 million grant.

"We were able to physically confirm today the presence of Jamal Badawi at a prison in Aden," said U.S. State Department spokesman Gonzalo Gallegos. Earlier, the State Department said it did not know where Badawi was.

Badawi, whose death sentence had been commuted to 15 years in prison over the attack that killed 17 U.S. sailors in the southern port of Aden, is one of 23 inmates who escaped from a jail in the Yemeni capital Sanaa in 2006.

One of the key planners of the attack on the destroyer Cole, Badawi turned himself in about two weeks ago and his relatives told Reuters on Friday his sentence had been commuted to house arrest and they had visited him at his Aden home.

The United States made no secret of its displeasure at this, saying it would find it "disturbing" if the report was true. On Monday, State Department spokesman Sean McCormack said flatly "this is somebody that needs to be behind bars."

Yemen, a poor country on the southern tip of the Arabian Peninsula that is the ancestral homeland of Osama bin Laden, is viewed in the West as a haven for Islamist militants.

The Millennium Challenge Corporation, a U.S. government corporation that provides assistance to poor countries that meet certain policy benchmarks, on Friday said it was putting on hold plans to give Yemen a $20.6 million grant.

While the MCC did not explicitly tie the decision to the report that Badawi had been let out of prison, a senior U.S. official said the two were "perhaps not unrelated."

Yemen was to receive the money to help it fight corruption and improve performance on MCC's indicators that measure the rule of law, political rights and fiscal policy. If it met the benchmarks, Yemen could be eligible for more U.S. assistance.

An agreement formalizing the grant was to have been signed on Wednesday but the MCC last week said it would postpone the grant and was "currently undertaking a review to determine the country's future status with MCC."

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