A senior Western diplomat called the decision crass and said that he would investigate the possible misuse of Iraqi oil money held by the United Nations.

Iraqi officials expressed outrage that the UN was using Baghdad’s oil money to help the legal defence of the senior official in charge of the Oil-for-Food programme under which Iraq was able to use its oil money to buy humanitarian goods.

The UN said that it had agreed “on a strictly exceptional basis” to reimburse some legal expenses incurred by Benon Sevan, who is under investigation for possible fraud in running the $60 billion programme.

The fees, thought to be about $300,000 (£160,000), are to be reimbursed from the Iraqi oil money that it holds in the so-called 2.2 per cent account set up to pay the UN’s administrative costs under the Oil-for-Food programme.

A United Nations statement said that the decision was necessary to secure Mr Sevan’s co-operation with the UN inquiry headed by Paul Volcker, the former chairman of the US Federal Reserve.

Yesterday the Volcker commission challenged the UN account, saying that it had not sought to pay Mr Sevan to ensure that he co-operated.

Mark Malloch Brown, the UN Secretary-General’s chief of staff, told a news conference that Mr Sevan would not be reimbursed for any legal expenses incurred after the release of Mr Volcker’s initial report in February.

That report found him guilty of “grave and continuing conflict of interest” for setting up oil deals between Iraq and an oil company owned by a cousin of Boutros Boutros Ghali, the former UN chief. “We believe the Volcker report has shifted the burden of proof to Mr Sevan,” he said.

Mr Malloch Brown defended Kofi Annan, his friend as well as his boss, after new revelations about payments to Kojo Annan, the Secretary-General’s son, from a company that won a UN border-inspection contract in Iraq.

The Financial Times reported yesterday that Kojo Annan had received at least $300,000 from a Swiss company, Cotecna Inspection SA, almost double the amount previously disclosed.

Mr Malloch Brown said that Kojo Annan had previously admitted that he had misled his father about payments he received from Cotecna.

However, he confirmed that the UN chief had himself held three meetings with the company’s officials.

In January 1997 Kofi Annan met Robert Massey, Cotecna’s chief executive, and his father, Elie-Georges Massey, the company’s founder and chairman, at the World Economic Forum in Switzerland. Mr Massey Sr also met Mr Annan at the UN headquarters in September 1998 and sought him out at a public event in Geneva in January 1999.

The Volcker commission is due to report on Tuesday on its investigation into the award of the Cotecna contract by the United Nations.

Mr Malloch Brown said that the UN chief had sought private legal advice from an outside lawyer, but that he was not being reimbursed by the United Nations.

“The Secretary-General has consistently maintained that he himself is not guilty of any wrongdoing and he believes the undertakings his son has given him that Kojo’s work for Cotecna had nothing to do with this contract,” he said.

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