The Lifeline for Gaza appeal, founded by Respect MP George Galloway, was mismanaged and raised less than a fifth of the £1m it claimed to have raised, according to a Charity Commission inquiry report published yesterday.
But the commission found no evidence that the charity provided money or material to Hamas after Galloway said that £25,000 he handed to the Islamist movement was "personal money".
Galloway founded the appeal, also known as Viva Palestina, in January 2009 to provide food to alleviate suffering in Gaza. A convoy of vehicles carrying humanitarian aid left the UK the following month.
The commission opened a statutory inquiry in March last year amid concerns about the appeal's financial governance and the possibility that it had breached financial sanctions against Hamas.
The year-long investigation discovered the appeal had raised £180,000 - far less than claimed.
"It was misleading to the public for the charity to claim on its website to have raised over £1m during the first convoy as this was not a monetary sum raised by or under the control of the charity's trustees," the report says.
It adds that the two founding trustees, who resigned in October, had mismanaged the appeal. They exposed charity funds to unnecessary risk by depositing them in an account run by another organisation called North Manchester Against Wars, it says.
The commission instructed the founding trustees to register the appeal as a charity, which they eventually did in April last year. The trustees had argued that the appeal was a political campaign and therefore did not fall within the commission's jurisdiction, but the commission ruled that it was raising charitable funds from the public and must therefore register as a charity.
The commission has told the charity to increase the number of trustees from two and prevent other groups from using its Viva Palestina branding.
It has also told trustees they must "address the risk of it being perceived as a political campaign both by the public and by those who work within it".
In a statement, the commission said: "As a result of the commission's intervention, Lifeline for Gaza was registered as a charity with the commission under the name Viva Palestina on 8 April. The commission ensured that the charity's funds were effectively managed and controlled by the trustees of the charity."
Third Sector was unable to contact either Galloway or a spokesperson for the appeal.
The inquiry report is here.