By Ben Farmer in Kabul
The president's brothers, Mahmoud and Ahmed Wali, are accused of having amassed millions of pounds since Mr Karzai took office even as most of Afghanistan remains poverty stricken. The development has fuelled a popular disillusionment and anger with the leadership that the Taliban has exploited.
Ahmed Wali Karzai has been dogged by allegations, which he denies, of involvement in the country's $3 billion opium trade, while Mahmoud Karzai has been accused of using his brother's influence to build a business empire that has made him one of the country's wealthiest men.
New York Times, March 5, 2009: "Eight years ago, Mahmoud Karzai was running a handful of modest restaurants in San Francisco, Boston and Baltimore. Today, Mr. Karzai, an immigrant waiter-turned-restaurant owner, is one of Afghanistan’s most prosperous businessmen.
.... Another brother, Ahmed Wali Karzai, the head of the Kandahar provincial council, has been accused of narcotics trafficking by Afghan and American officials, who are frustrated that the president has not taken action against him."
(Photo: The New York Times)
Max Boot, a senior fellow at the Council on Foreign Relations, a research centre, said: "There's a perception that members of his family are benefiting from his position. It's bad for our counter-insurgency efforts."
The rumours of corruption and displays of obvious wealth were providing propaganda for the insurgents.
One Western diplomat said: "We are losing this war to corruption."
Diplomats fear that Mr Karzai shows little appetite to rein in his brothers, despite intense pressure from his international backers and attempts by Western intelligence agencies to investigate his siblings' assets.
Malou Innocent, a foreign-policy analyst at the Cato Institute, a Washington-based think tank, said the Taliban was using the Karzai brothers' wealth as evidence that the president was a puppet of the Nato-led forces. "It's getting worse," she said. "There doesn't seem to be any silver bullet for getting rid of it considering how endemic it is."
Ahmed Wali Karzai, 48, who has a portfolio of land, transport and private security business interests in the southern city of Kandahar, said the allegations of unproven links with the drug trade were aimed at weakening his brother.
Any involvement in opium production is considered particularly harmful because the drug trade channels hundreds of millions of dollars into the insurgency each year. Taliban commanders earn huge sums from drug traffickers and growers by charging tithes or protection money and providing convoy guards.
Mahmoud Karzai, 54, who has interests in mines, a cement factory and property, denied that he had capitalised on his brother's influence.
A spokesman for the president said allegations that he ran the country as a "family business" were "absolute rubbish" and propaganda spread by his enemies.
Despite the allegations, Mr Karzai remains the favourite to win the election on Aug 20.
His main challenger, Abdullah Abdullah, the former foreign minister, claims to have enough support to force a second round of voting but Mr Karzai sought to strengthen his position by offering another challenger a job.
The president offered to make Ashraf Ghani "chief executive" if he stood down and pledged his support. Mr Karzai and Dr Ghani are both Pashtuns from the south and the president's advisers believe an alliance could prevent a split in the ethnic vote.