A US-funded project to build a hospital in Afghanistan paid $500 a gallon for fuel instead of a market rate of $5, a watchdog said Wednesday in a damning report into overspending and waste.

The Special Inspector General for Afghanistan Reconstruction (SIGAR) said that construction of the 100-bed hospital in Gardez, Paktiya province, was 23 months behind schedule.

It accused USAID's implementing partner, the International Organization for Migration (IOM), of "weak internal controls" that led to overpayments of at least $507,000.

"IOM paid the contractor $300,000 for 600 gallons of diesel fuel -- a cost of $500 per gallon. According to IOM officials, the market price in Afghanistan for diesel fuel should not exceed $5.00 per gallon," the SIGAR report said.

"IOM (also) paid $220,000 for an automatic temperature control device that should have cost between $2,000 and $10,000.

"IOM could not provide us with a vendor invoice for either of these payments," it added. "USAID did not discover the overpayments and reimbursed IOM for these unwarranted costs."

SIGAR, which has issued a string of highly critical assessments of US reconstruction projects in Afghanistan, recommended that USAID should seek to recover the cash from IOM.

USAID issued a statement saying that it was conducting an audit into the project, and would "take swift action to address any problems and recover funds" if the allegations were proved to be true.

Richard Danziger, IOM's chief of mission for Afghanistan, said it denied any overpayments and expected to be cleared by the USAID review.

"We will cooperate with the audit and are confident that any allegations will be proved to be incorrect," Danziger told AFP, adding that the delays in construction were due to the hostile environment in Gardez.

The SIGAR report will raise further worries about wastage of the billions of dollars of international aid spent in a country that is set to rely on donor funding for years as it battles a resilient Taliban insurgency.

In July, SIGAR criticised USAID for spending nearly $50 million on programmes which had failed to strengthen Afghan local government or improve stability,

It has also said the US was not properly monitoring a programme to train judges and lawyers, and was spending $771 million on aircraft for Afghanistan in a project that was at risk in part due to a lack of literate recruits.