Relations between Mexico and the United States are being pushed to breaking point amid accusations by Washington that Mexican officials have been “in bed for years” with drug traffickers, and reports of CIA agents freely operating south of the border.

“There are many who are betting on the defeat and failure of the Mexican government,” said Claudia Sheinbaum tersely on Wednesday, when asked about the allegations at a news conference. ”We want a good relationship with the United States government. What are our limits? The defence of sovereignty and respect for the Mexican people and their dignity.”

Sheinbaum’s comments follow inflammatory testimony from Drug Enforcement Agency (DEA) director Terry Cole before the US Senate on Tuesday.

“There’s no doubt that the narco traffickers and high-ranking government officials in Mexico have been in bed for years,” Cole said. “They are just as much responsible for the death and destruction of record amounts of Americans by cooperating, by conspiring, by helping, producing this poison to come across the border.”

Mexico has been under intense pressure from Washington for months to tackle drug trafficking groups, with President Donald Trump repeatedly threatening to send troops south of the border. But in recent weeks, that pressure has intensified, pushing Sheinbaum into a delicate balancing act between trying to appease her party and mollify an increasingly hawkish White House.

“It’s the most tense, the most difficult situation since at least the 1980s,” said former Mexican foreign minister Jorge Castañeda. “We’re in a moment the likes of which we have never seen, at least not in my memory.”

Despite Trump’s constant threats, Sheinbaum had kept a calm demeanor for months – denying that there would be any kind of US presence in Mexico even as she repeatedly bowed to Washington’s wishes. In the last year, the Mexican government has transferred nearly 100 cartel members to face justice in the US.

When Mexico, with the support of US intelligence, killed the leader of the country’s most powerful cartel in February, American officials celebrated, with deputy secretary of state Christopher Landau calling it a “great development”.

But relations began to fray last month when reports emerged that several CIA agents had been involved in a raid on a drug lab in northern Mexico, apparently without approval or prior knowledge from the federal government, potentially violating the country’s constitution.

Then, the US justice department charged the governor of Sinaloa, Rubén Rocha Moya, and nine other current and former Mexican officials for alleged ties to the Sinaloa cartel, accusing them of aiding in the massive importation of illicit drugs into the United States.

The indictment of a high-ranking member of Sheinbaum’s Morena party with almost no prior warning came as a slap in the face to the Mexican leader. Rather than handing him over, however, Sheinbaum closed ranks, arguing that Washington had failed to produce meaningful evidence.

“We will not allow any foreign government to come and decide the future of the Mexican people,” she said.

But last week, US acting attorney general Todd Blanche said there would be more charges against Mexican officials for links to cartels. The threat was made even more explicit on Tuesday when DEA director Cole said that Rocha’s indictment was “just the start about [sic] what’s to come in Mexico”.

Amid the flurry of collusion allegations, Sheinbaum is being increasingly backed into a corner, analysts say.

“Mexico has to be constantly on the defensive,” said Jesús Pérez Caballero, an expert on US-Mexico relations at the College of the Northern Border. “It’s very difficult for it to establish a counter-narrative that aligns with Mexico’s interests if it constantly has to respond to these accusations.”

Also on Tuesday, CNN published an explosive report alleging that the CIA had intensified covert operations in Mexico through the agency’s Ground Branch unit. According to CNN, the CIA “facilitated” the March assassination of a mid-level cartel member who was killed when a bomb exploded in his car, during the day, on one of the country’s busiest highways.

CNN also said that the CIA had been involved in multiple “deadly attacks” on cartel members since last year.

The report followed comments from Trump last week that a “land force” was already operating in Mexico.

“You’ll hear some complaints from … representatives from Mexico and other places,” Trump said. “But if they’re not going to do the job, then we’re going to do the job.”

Sheinbaum, however, was emphatic in her rejection of CNN’s reporting on Wednesday.

“It’s false that CIA agents operate in our territory,” she said during a news conference. “It’s a fiction about the size of the universe.”

Still, for all her bravura, it is likely that Sheinbaum will have to cave into America’s demands eventually: Mexico’s intimate relationship with the US, particularly on the economic front, leaves the Mexican leader with little wriggle room.

“She has a problem with the United States that is unsolvable,” said Castañeda. “She has to hand over Rocha, and the others they ask for. Period. There is no alternative. There is no possibility that she won’t do so without an enormous cost.”

JD Vance has threatened to “turn off” federal funding for government health insurance programs in states that refuse to comply with the Trump administration’s crackdown on suspected fraud.

States which fail to “get serious” about fraud would lose Medicaid and Medicare funding, the US vice-president announced on Wednesday, sparking fresh accusations that Trump officials are using unfounded allegations to punish political rivals.

Hospices and home health agencies are also halted from new Medicare enrollment for six months while the Centers for Medicare and Medicaid Services (CMS) investigates potential fraud alongside Vance’s anti-fraud taskforce, the agency announced on Wednesday.

The administration will review anti-fraud funding for states that it deems to have failed to tackle fraud, Vance said. “And if we continue to find problems, we can turn off other resources within their state Medicaid programs as well.

“Our goal here is not to do that. We don’t want to turn off any money,” the vice-president claimed. “What we want to do is ensure that people are taking fraud seriously.

“We want to protect Medicaid. We want to protect Medicare. But we can’t do that if the states that are administering those programs are allowing those programs to be fleeced by fraudsters.”

The news follows a crackdown on Minnesota and three other Democratic states, as well as a freeze on new medical suppliers for Medicare. Donald Trump signed an executive order in March to create a taskforce on eliminating fraud.

The Vance investigation on Medicaid is set to include audits of the watchdog organizations tasked with guarding against fraud, known as Medicaid Fraud Control Units (MFCUs), which are funded federally. The audits seek to reveal whether the units are pursuing known abuse of Medicaid.

Attorneys general in all 50 states reportedly received a letter from Thomas Bell, inspector general at the US Department of Health and Human Services (HHS). “This means your failure to do your job,” Bell wrote, according to the Wall Street Journal, “has put all of your state’s Medicaid funds in jeopardy.”

More than $300m in funding was halted to Minnesota in recent months because federal officials believed the state was not in compliance with other requirements. CMS recently stayed that hold on funding.

“But as radical as the Minnesota withhold was, it did not involve ‘all of the state’s Medicaid funds’,” said Andy Schneider, research professor of the practice at Georgetown University’s Center for Children and Families. “There’s no statutory or regulatory basis for withholding all of a state’s federal Medicaid matching funds due to non-performance by a MFCU,” he said.

The HHS doesn’t have the authority to withhold all of a state’s federal Medicaid funds, and “CMS, which does have the authority, has never done so and is not going to do so”, Schneider said. He has cautioned that “it’s important to watch what CMS does (and doesn’t do), not what [CMS administrator] Dr [Mehmet] Oz or Vice-President Vance says.”

About 850 agents and brokers suspected of fraud were reinstated under the Trump administration, Lloyd Doggett, a Democratic representative from Texas, pointed out at a recent congressional hearing. “Your administration was the one that let them all go back to work,” he told the HHS secretary, Robert F Kennedy Jr.

In response, Kennedy claimed that was “not a credible story”, and focused instead on alleged fraud by home health aides, including family members, whom he said may receive payment from CMS for taking care of elderly and disabled people. “These are family members getting paid to do things that they used to do as family members for free, and this is rife with fraud,” Kennedy said, claiming that the US was “paying for fraud now as much as for medicine”.

The allegation rippled through the disability community. Caregivers who receive federal payments are frequently not able to work other jobs or support their families otherwise.

“Waiting lists are already long, and the serious fraud – which does happen – isn’t coming from individuals who need help, but from bad companies and lax oversight,” said David Perry, a journalist, historian and parent of a disabled adult. He has recounted the ways increasingly complicated rules have made it difficult to apply for his son’s benefits.

“Republican anti-fraud programs are not about building the capacity to help people who need it while making sure funds are not stolen, but stripping away capacity in order to punish political rivals,” he said.

The HHS did not respond by press time to the Guardian’s questions about what fraud investigation non-compliance would entail, and how these moves would affect access to caregiving.

New providers of home health and hospices were “a key source of fraudulent activity”, CMS said in its statement, highlighting states that it deemed to have “elevated fraud risk”, including Arizona, California, Georgia, Ohio, Nevada and Texas.

It’s not new to scrutinize state-level fraud investigations, but this news “differs from prior approaches in its greater reliance on financial penalties for states”, said Alice Burns, associate director of the Medicaid and the uninsured program at KFF, a health policy non-profit.

“It’s still unknown how extensively CMS will apply financial penalties to other states or the shares of Medicaid funding that might be at risk,” Burns said. Such moves could force states to make difficult decisions on funding Medicaid, which could affect providers and enrollees who are not involved in fraud, waste or abuse, she added.

There have already been major restrictions on such coverage. Last year, Congress cut nearly $1tn in Medicaid spending – the largest decrease in history, taking away coverage from 7.5 million low-income people.

For now, the announcements are “very preliminary, and we don’t know for sure that any federal Medicaid funding will be withheld”, Burns said. “However, the deferrals of federal Medicaid funding in Minnesota are ‘historically unprecedented’, and if the scope of deferrals increases, there could be implications for access to Medicaid services in affected states.”