George Galloway’s campaign against Iraq sanctions was bankrolled using aid diverted by Saddam Hussein’s regime and the MP may have known about the illicit funding, the Charity Commission says today.

The commission spent more than a year studying financial records and Iraqi Oil Ministry documents and interviewing oil market sources.

Mr Galloway, who has always denied a link between the Oil-for-Food scandal and his antisanctions Mariam Appeal, accused the commissioners of a grand smear against him. The Mariam Appeal was created in 1998 after the MP brought a four-year-old Iraqi girl to Britain to be treated for leukaemia.

The report opens the door for the Iraqi Government to sue the appeal’s trustees, including the MP, to return $376,000 (£188,000) of diverted aid. The Parliamentary Commissioner for Standards is still investigating a complaint that Mr Galloway received money from Saddam under the Oil-for-Food programme.

Lord Goldsmith, the Attorney-General, asked the commission to investigate after The Times reported that the fund had paid for the MP’s trips to fifteen countries, including eight visits to Iraq. The appeal ran a prominent international political campaign to end the UN embargo on Iraq but, as it was not a registered charity, no one could tell who was funding it.

Two previous inquiries by the commission found that the appeal should have been registered but accepted that its funds were used generally for charitable purposes.

Even more damaging than today’s finding that the fund was in effect being paid for by Saddam’s regime is the suggestion that the MP may have known about the tainted source, despite denials under oath to the US Senate and in a High Court libel trial against The Daily Telegraph.

The Oil-for-Food programme was designed by the UN so that Iraq could use its oil wealth for humanitarian aid despite an international embargo.

“The commission is also concerned, having considered the totality of the evidence before it, that Mr Galloway may also have known of the connection between the appeal and the programme. Mr Galloway has continued to deny that he was aware of any such connection,” the report states.

A commission spokeswoman said: “This information was acquired on a confidential basis from a number of sources.” British diplomats in Baghdad have asked Tariq Aziz, Saddam’s detained former Deputy Prime Minister, to help inquiries into whether Iraq paid into the Mariam Appeal. The appeal’s total known income was £1,468,000. Fawaz Zureikat, a Jordanian businessman and friend of Mr Galloway, was a donor, providing £448,000. At least half his gifts came from the Oil-for-Food programme, the commission found.

The trustees, who included Mr Galloway and Mr Zureikat, are accused by the commission of failing to make sufficient inquiries into the funding’s source. The Serious Fraud Office and the Metropolitan Police have looked into the Mariam Appeal and are taking no further action.

Mr Galloway said that the commission had “not bothered to interview me”, but a commission spokeswoman said that he had declined to meet it.

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