Many orphanages in southern Philippines are being investigated as possible conduits for terrorist funding, a source said.

Authorities believe they could be housing children of terrorists who are being trained for suicide attacks, similar to the kind that left 6,000 dead in New York and Washington on September 11.

One orphanage in Mindanao has been pinpointed to have received funding from the International Islamic Relief Organisations (IIRO)," Candao Abbas said in a television interview.

The Philippines is part of the U.S. effort to stop money laundering for terrorists, an alleged financial strategy adopted by Osama bin Laden, the suspected mastermind behind the U.S. attacks. "Bin Laden's brother-in-law Mohammad Jamal Khalifa was a director general of the IIRO when it was established in Jolo," said Abbas.

The IIRO, one of the agencies linked to bin Laden, has headquarters in a Gulf country, Canada, the U.S. and Pakistan.

American investigators started monitoring IIRO's alleged involvement with bin Laden, following the investigation of Mahmoud Jaballah for involvement in the U.S. attacks. He previously worked for the IIRO, investigators said.

The group is part of the Muslim World League, which is funded by a Gulf state.

The orphanages could be assisting children of deceased terrorists. They can indirectly support the fighters, said Herbert Mueller of a German government agency that monitors extremists.

His assessment that funds for terrorism come from legitimate businessmen and charitable organisations has prompted Philippine authorities to investigate Muslim orphanages in Mindanao.

Khalifa earlier wrote a letter to President Gloria Macapagal-Arroyo saying he could persuade Abu Sayyaf leaders to release two American nationals and 16 Filipinos who are held hostage in the hinterland of Basilan since April and May this year.

Khalifa denied allegations that the non-government organisations he had established in Mindanao were conduits for terrorism and bin Laden.