25 October 2010 Last updated at 09:43 ET
Mr Karzai said the cash was used to maintain the presidential palace and run his office
Afghan President Hamid Karzai has acknowledged that his office has received cash from Iran, but insists it was part of a "transparent" process.
Mr Karzai was responding to a report in the New York Times that Tehran had been passing bags stuffed full of cash to Mr Karzai's aides.
The cash was intended to promote Iran's interests in Kabul, the report said.
However, Mr Karzai said the money was not for an individual but to help run the president's office.
Speaking at a news conference, he said many countries had given money to Afghanistan in this way, including the US.
"The government of Iran has been assisting us with five or six or seven hundred thousand euros once or twice every year, that is an official aid," he told reporters, according to the AFP agency.
He said his chief of staff, Umar Daudzai, "is receiving the money on my instructions".
"The cash payments are done by various friendly countries to help the presidential office and to help dispense assistance... in various ways to the employees around here, to people outside, and this is transparent," he said.
"This is something that I have also discussed... at Camp David with President Bush. This is nothing hidden.
"We are grateful for the Iranian help in this regard. The United States is doing the same thing, they're providing cash to some of our offices."
The New York Times report said that last August, at the end of an official visit to Iran by Mr Karzai, a large bag of euro notes had been passed to Mr Daudzai by Iran's ambassador to Afghanistan, Feda Hussein Maliki.
It was part of a "secret, steady stream of Iranian cash to buy the loyalty of Mr Daudzai and promote Iran's interests in the presidential palace", the report said, citing Afghan and Western officials.
The officials alleged that the payments, totalling millions of dollars, had been used to pay Afghan politicians, tribal elders and even Taliban commanders to secure their loyalty.
The former EU envoy to Afghanistan, Francesc Vendrell, said the practice was far from unusual.
"Many governments that hope to court influence are paying and providing money to the president's office in what I would call a slush fund. This has been going on since the very beginning, and the Americans are very much in the vanguard. So I'm not surprised the Iranians are doing it," he told the BBC.
He added that the payments were symptomatic of the West's failure to establish a proper government in the country.
"It is in the interest of any Afghan government to be in good relations, with at least one neighbour, if not the two major ones. What bothers me is that the West has failed to establish a kind of government run by rule of law and with an established system that would make it impossible or totally unacceptable to use these means of gaining influence."
On Monday, the Iranian embassy in Kabul strongly denied the report, describing the claims as "ridiculous and insulting".
"Such baseless speculations are being spread by some Western media outlets in order to confuse public opinion and damage the strong ties between the governments and nations of the Islamic republics of Afghanistan and Iran," a statement said.
Meanwhile, Nato said on Monday that at least 15 militants had been killed in an overnight air strike in southern Helmand province.
Some unconfirmed reports said civilians had died in the attack. The Helmand governor's office told the BBC they could neither confirm or deny whether those who died in the incident were civilians, and an investigation was under way.
BBC News, Kabul
Cash is king in Afghanistan and so, in many respects, the news that Iran handed over hard currency is unsurprising. As President Karzai said, a number of friendly countries - including the US - give assistance in cold, hard cash.
But his admission will do little to reassure some of his foreign supporters who have been concerned at corruption within his government, and Tehran's growing influence in the country.
And his lack of precision didn't help matters - "once or twice in a year, Iran has given five hundred, or six hundred, or seven hundred thousand euros," he said, leaving some to ask - where did the money go, and did all of it make its way into the finance ministry's coffers?
Despite receiving billions of dollars in aid, Afghanistan remains one of the poorest countries in the world.
Iran opposed the Taliban government of 1996-2001 and backed opposition group the Northern Alliance.
In 1998 the Taliban killed eight Iranian diplomats and an Iranian reporter
Iran concerned about drug trafficking across shared border
More than one million Afghan refugees and many illegal migrants still in Iran
Iran says it is a major investor in Afghanistan. It has built roads, bridges, power lines and border stations
Iranian influence in Afghan affairs is a growing concern to the US and its allies
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