Izzedin Mohammed Hassan al-Majid, Saddam’s second cousin, was arrested in Fallujah last month while allegedly working to unite guerrilla organisations fighting the Iraqi interim Government and the US-led military coalition.

Mr al-Majid, 44, “was involved in the process of uniting the terror groups Ansar al-Sunna, Muhammad’s Army and the Islamic Resistance Army”, Thair al-Naqib, a spokesman for Iyad Allawi, the Iraqi interim Prime Minister, said.

The former Republican Guard officer, who fled Iraq with Saddam’s son-in-law, had $35 million in his bank account and in the accounts of family members, Mr al-Naqib said.

“Additional questioning has determined that Majid also controlled as much as a third of the former regime assets missing from the Iraqi Government,” the spokesman said.

“We believe that Majid, through front companies he controlled in the Middle East and Europe, controlled anywhere from $2 billion to $7 billion of money stolen by the former regime to fund the current terrorist operations.”

Mr al-Majid had been living in Bramhope, north of Leeds, but neighbours said that he had not been seen there for almost a year. He lived in a £300,000, three-bedroom bungalow with his second wife, Intisar, and their four children. Last night she denied that her husband had any involvement in the funding of terrorism.

Speaking to The Times from her home in Lebanon, she said that all the allegations had been fabricated. “My husband has set up his own political party (the Iraqi National Rescue Party), which the Americans and the British know all about,” she said.

Friends in the Iraqi community in Leeds also voiced amazement at the allegations. Ashad Ishmail, a former Iraqi Ambassador to Spain, said that Mr al-Majid had been a fierce critic of Saddam. “He had a wife and four children killed by Saddam and I don’t understand why he would want to support the former regime,” he said.

Mr al-Majid fled Iraq in 1995 for Jordan with his brother-in-law, Hussein Kamel, Saddam’s son-in-law, and their families.

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