Berkshire Hathaway, the holding firm of US billionaire Warren Buffett, said it had voted against Kraft's plans to sell new shares to help fund the takeover.
It said the share sale gave Kraft a blank cheque allowing it to change its offer "in any way it wishes".
However, the company said it may change its vote if the final bid "does not destroy value for Kraft shareholders".
BBC business editor Robert Peston said Kraft's plans to buy Cadbury were now in jeopardy.
Cadbury shares fell on the news, closing 3.2% lower in London at 779 pence.
Kraft has until 19 January to announce its final offer for Cadbury.
Roger Carr, chairman of Cadbury, told me: 'In essence Kraft's offer is limited by powerful Kraft shareholders restricting what they can offer'
Robert Peston, BBC business editor
Kraft is planning to issue 370 million new shares in order to help finance its takeover of Cadbury.
But Berkshire Hathaway - which says it owns 9.4% of Kraft, making it the firm's largest shareholder - says this plan will allow Kraft to alter its bid however it wishes.
"And we worry very much that, indeed, there will be an additional change from the revision announced this morning," the firm said in a statement.
"To state the matter simply, a shareholder voting 'yes' today is authorising a huge transaction without knowing its cost or the means of payment."
Earlier on Tuesday, Kraft announced it had sold its North American pizza business - which sells brands including DiGiorno and California Pizza Kitchen in the US and Canada - to Nestle for $3.7bn (£2.3bn).
KRAFT BID TIMELINE
7 Sept: Kraft tables offer for Cadbury, valuing the company at about £10bn. The bid is immediately rejected by the Cadbury board
9 Nov: Kraft goes hostile with its takeover bid, and Cadbury again rejects the offer
4 Dec: Kraft details offer aimed at Cadbury shareholders, setting 5 January deadline
14 Dec: Cadbury publishes its defence document, urging its shareholders to reject the Kraft offer
31 Dec: Deadline for shareholders to accept the Kraft bid is extended to 2 February
5 Jan: Kraft announces revised offer with higher cash proportion
15 Jan: Deadline for Cadbury to issue trading update
19 Jan: Deadline for Kraft to publish details of revised offer
2 Feb: Deadline for Cadbury shareholders to accept Kraft bid
It said it would use the money raised to increase the proportion of cash in its offer to Cadbury shareholders in order to make its bid more attractive.
The sale means Kraft will be able to offer an extra 60p per share in cash, though the overall value of the offer is not being increased.
Kraft's original bid was £3 plus 0.26 new Kraft shares for each Cadbury share - a deal that analysts said would be unlikely to tempt shareholders.
The Cadbury board responded by again calling the offer "derisory".
"Despite this tinkering, the Kraft offer remains unchanged and derisory with less than half the consideration in cash," it said in a statement.
In addition to buying Kraft's pizza business, Nestle also ruled itself out of the running to buy Cadbury.
Nestle had been linked to a possible offer, and on Monday, that speculation was fuelled when Nestle sold its remaining stake in eye-care group Alcon to Novartis for $28.1bn - a deal perceived as freeing up cash for a Cadbury bid.
In a statement, Nestle said its decision not to make, or participate in, a formal offer for Cadbury followed discussions with the UK Takeover Panel - the body in charge of regulating takeovers.
That means Kraft remains the only current bidder for Cadbury, although US confectioner Hershey has previously expressed its interest in a possible bid.
Share Investor Blog - Stockmarket & Business commentary
Share Investor New Zealand Business News- Get more business news
Discuss this topic @ Share Investor Forum - Register free
Share Investor's Daily Forex Updates
Recommended Amazon Reading
|Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage by Mary Buffett |
Buy new: $16.47 / Used from: $15.70
Usually ships in 24 hours
|The Essays of Warren Buffett: Lessons for Corporate America, Second Edition by Warren E. Buffett|
Buy new: $26.10 / Used from: $33.05
Usually ships in 24 hours
From Amazon - Apple iPod touch 32 GB (3rd Generation) NEWEST MODEL