The Canadian government is investigating an allegation that a prominent UN aid agency is employing members of what Ottawa considers to be a terrorist organization.

Peter Hansen, the head of the UN Relief and Works Agency says some of its workers in the Mideast are members of Hamas, but Hansen says that's not a crime.

The agency provides aid to Palestinian refugees. Ottawa contributes about $10 million per year to the UNRWA.

UNRWA Commissioner General Peter Hansen

Hansen's admission has raised the possibility that Canada is indirectly supporting Hamas, which Ottawa has put on a list of banned groups, making it a crime to support it.

The dispute began when military pictures emerged that Israel said showed a man putting a rocket into a UN vehicle. The UN says it's just a stretcher.

It illustrates Israel's suspicion that UNRWA is used as a front by militants.

The disputed image from Israeli Defense Forces Video.

That suspicion was fuelled by a CBC News interview with Hansen, who conceded some UNRWA employees are almost certainly members of Hamas. "I am sure there are Hamas members on the UNRWA payroll," he said. "And I don't see that as a crime."

Hansen's comments topped Israeli newscasts and were brought to the attention of UN Secretary General Kofi Annan.

The UN says, quite bluntly, it does not hire terrorists. "What Mr. Hansen was saying was that Hamas also carries out social and humanitarian work and not every Hamas member is a militant or a terrorist," said Fred Eckhart, spokesman for the secretary general.

"We do not, when we hire people anywhere in the world, ask about political affiliations. But we do require our staff, local and international everywhere in the world, to conduct themselves in accordance with established practices, principles of the United Nations.

"They must not engage in any activity that is incompatible with their status as independent impartial civil servants. So, should we see any indication that a UN staff member is engaged in any illicit activity, or illegal activity, we will respond quickly and strongly."

The problem is not everyone draws a distinction between the militant and humanitarian sides of Hamas, including Canada.

A spokesperson for Foreign Affairs Minister Pierre Pettigrew said, "we have expressed our concern to Mr. Hansen and we are examining the legal implications of this issue."

The legal implications could involve Canada's $10-million annual donation.

Aurel Brown, a specialist in international relations at the University of Toronto, says Canadians "want to make sure the money we spend is meant to help the population."

Conservative foreign affairs critic Stockwell Day says the government should take direct action and make "it very clear that it is unacceptable for a UN agency to have in its employ members of a banned terrorist organization."

Next week a major donors conference takes place for the UN Relief and Works Agency for Palestine. A senior Canadian official says Canada may use the conference to raise the issue of Hamas members working for a UN agency.