Israel?s Housing Ministry, run by a pro-settler coalition partner, has funnelled nearly $7 million into building unauthorised Jewish settler outposts in the West Bank, a state auditor?s report said on Wednesday.

The inquiry found the ministry had transferred 29.7 million shekels ($6.6 million) to pay for electrical grids, roads, water pipes and other infrastructure in settler outposts from January 2000 to June 2003.

The revelation was likely to anger Israel?s closest ally, the United States, which has demanded the outposts be dismantled as part of an internationally backed ?road map? for peace between Israel and the Palestinians.

The findings by State Comptroller Eliezer Goldberg could lead to a criminal probe into the illicit funding as has happened in the past with findings of wrongdoing by the state auditor, a Justice Ministry source said.

?This is the proof. This is not something the settlers do by themselves. This is government policy,? said Yariv Oppenheimer, a spokesman for Peace Now, an Israeli protest movement that monitors settlement building.

The Housing Ministry is headed by Effi Eitam, leader of the far-right National Religious Party, which considers the West Bank and Gaza to be part of the biblical Jewish homeland.

Israel captured the territories in the 1967 Middle East war. Around 140 settlements have been built there.

The international community regards the settlements as illegal. Israel disputes this.

According to Peace Now, there are 102 small outposts, most of them inhabited, built in the West Bank without government approval since Prime Minister Ariel Sharon took office in 2001. Most consist of small clusters of caravans on isolated hilltops.

Twenty-one outposts, most of then uninhabited, have been removed during Sharon?s tenure, the group said, but Sharon has been slow to fulfil his pledge to Washington to dismantle them all.

The Supreme Court dismissed petitions by settlers protesting against plans to evacuate them in March, clearing the way for the government to start taking action.

Attorney General Menachem Mazuz last month froze funding to all settlements in the West Bank and Gaza Strip, including larger, established enclaves while a mechanism was set up to prevent state funds from being transferred to unauthorised settlement projects.

A Justice Ministry spokesman said the ban was reversed after a monitoring system was put in place preventing municipalities at registered settlements from transferring government funds to activities at unauthorised outposts.

Megan Goldin