Visitors to the home of Yassin al-Qadi in the heart of the Saudi port city of Jeddah are greeted by the sound of water trickling from a fountain at the centre of a cobbled courtyard. Beyond the gates, the villa is decorated in the Moorish style of Andalusia. The visitor is greeted by a table spread with tea, juice and cakes.

It is a peaceful scene, but on October 12, Mr al-Qadi appeared on a US list which included known al-Qaeda activists, Yemeni honey shops and militant Islamist organisations. All were part of a US executive order designed to block financial or other services in support of terrorism.

Action by 147 countries since the September 11 attacks in the US has led to $104m of assets being blocked.

No other part of the world has had more attention focused on it in the hunt for terrorist money than the Gulf. In spite of efforts by the governments of the region to clamp down on companies and individuals identified by the US as having terrorist connections, the dogged pursuit of the money trail has been greeted with dismay and even resentment among Gulf Arabs.

Not only are transactions difficult to track, many of them involving vast amounts of cash that do not show up on any official records, but the hunt for terrorist financing has invaded areas of daily life that touch on sensitive issues of religion and traditional attitudes to culture and business.

Since the US focused attention on the issue of al-Qaeda's financial network, two patterns have emerged from allegations of the financing of terrorism by Saudis.

In the Saudi case, the first involves deeply religious individuals who might have regarded bin Laden's war as a legitimate battle against a superpower that occupies the Muslim holy land of Saudi Arabia through the presence of 5,000 American troops, and which oppresses the Arabs by backing Israel.

The second involves businessmen and Saudi-based charities who believed they were giving money to support humanitarian work among Muslims in places such as Bosnia, Palestine and Afghanistan, but where the local affiliates diverted the funds to more sinister use.

The US believes Mr al-Qadi belongs to the first pattern. He has long been dogged by allegations of ties to terrorism, through his Muwafaq Foundation.

However the evidence is circumstantial and those close to his legal team believe that the most recent US accusations of ties to Osama bin Laden would never stand up in court. "He was just in the wrong place at the wrong time," says one. "This case is like claiming that the Pope has children."

On the personal side, are family and business links to the bin Laden family. However,

many of Jeddah's merchant families knew, or were aware of, Osama bin Laden and have had ties with Saudi Binladin Group, the family's construction conglomerate.

Mr al-Qadi's assets have also been frozen in countries ranging from Saudi Arabia to Albania, where the authorities this month halted work by his Karavan Construction Company on two high-rise blocks in Tirana. The Saudi government, while saying that it believes Mr al-Qadi is innocent, was forced to follow US requests and block his accounts in the kingdom.

This treatment has engendered sympathy for Mr al-Qadi. Jeddah's merchant families, and even members of Saudi Arabia's royal family, have rallied round him. "I'm getting support even from people who do not know me. Some are even offering financial help," he says. "It lifts my spirits."

Meanwhile, his lawyers have been working hard to discredit the American allegations, challenging the US order in British courts and in the European Court of Justice.

Moreover, reports have been circulating in Jeddah that far more prominent businessmen than Mr al-Qadi are under suspicion by the US, even if their names remain off the official Treasury lists.

By Jeddah standards, Mr al-Qadi is a small fish. Much more wealthy are families such as the bin Ladens, who disowned Osama in 1995, and the bin Mahfouz, the founders of the National Commercial Bank, the country's largest bank.

Last month the UK charities commission froze the funds of the International Development Foundation (IDF), which has two bank accounts containing a total of £250,000. Four of the charity's trustees are from the bin Mahfouz family.

Not only is it hard to chase the people who give money to terrorists, but it is hard to chase the money itself.

The task of tracing alleged terrorist financing from much of the Arabian peninsular is complicated by the determination of many Muslims to observe their religious obligations and fund a variety of causes.

Furthermore, most transactions are in cash. Al-Qaeda kept its assets as gold, which is not subject to rigorous transfer restrictions in the region. This is widely believed to have facilitated the transfer of assets by al-Qaeda out of Afghanistan to the gold markets of the United Arab Emirates since the fall of the Taliban.

Bankers describe some of the eye-rolling realities of cash transactions, even in Abu Dhabi and Dubai.

At least two banks in the UAE, one local and one foreign, are known to keep cadres of staff whose sole job is to cater to individual cash demands, which could be anything from $500,000 to $2m a time from local VIPs.

"Quite simply," said a senior foreign banker, "it lies in the history and culture of tribal societies recently enriched by oil. It is all the more sensitive because the engrained habits of these cash-cultures start at the highest levels of sheikhly government."

"It's all very well," lamented a foreign banker in the Gulf, "for officials to talk about 'registering charities'. But it's a waste of time if these charities are getting hundreds of thousands of dollars from unknown individuals in cash, each time these individuals go on holiday."

Saudis last year donated $267m to charities, much of it destined for areas of the world in which Muslims are facing conflicts.

"Who didn't pay for Kashmir and Chechnya? Muslims were being hurt there, and people didn't ask where the money was going," says a Saudi businessman. "It's about defending their brethren."

In an effort to assert itself, the Saudi Arabian central bank has announced that it has taken "appropriate action" against 150 accounts and a new money laundering law is being drawn up. Earlier this month the government said it would take "all possible action" to prevent charities from being used for illegal purposes.

The UAE introduced new anti-money laundering legislation on January 23. It was through the UAE that much of the finance for the September 11 terrorist attacks in the US is known to have been passed via the unregulated hawala money transfer system by a Saudi al-Qaeda operative called Mustafa Ahmed al-Hawsawi, According to Sultan al-Suweidi, UAE central bank governor, prior to the legislation 13 suspect accounts had already been frozen in the UAE and one exchange house - out of nearly 200 currently operational - has been ordered to close in the wake of September 11.

Meanwhile, bankers in Saudi Arabia say monitoring charitable donations is difficult because the kingdom has no tax system or internal revenue service that audits accounts. Companies pay zakat, a religious tax, but in many cases keep two sets of books to minimise the payment.

Businessmen, meanwhile, predict that those who want to give to the likes of Mr bin Laden will always find ways. As one said: "You can easily move small amounts of money. We're not talking millions of dollars here, but cash can be taken in suitcases."

At the same time, many Gulf Arabs resent western insistence on tighter security in areas of daily life which touch on traditional attitudes of religion, culture and business methods.

Gulf charity organisations, according to one western diplomat, "are just one of the many very murky routes which have not been fully investigated".

Nor will they be, say many UAE businessmen, who anyway scoff at the notion that funds for legitimate Muslim charities, raised in part from small donations after Friday prayers, could be a significant source of terrorist funding.

"And where money is raised," said one Dubai businessman, "like money given to Palestinians, or Muslims in Bosnia, and Chechnya, it will not stop."

"Gulf rulers," said one senior official, "do not need to conduct opinion polls to know what their people think about America or terrorism. They both shape, and echo, popular sentiment."

Among Saudis, the embarrassment of being associated with terrorist financing was exacerbated by concerns that the kingdom's leading businessmen would be tarnished even if later proved innocent, and that the Muslim world's largest charities would all become targets for suspicion.

The US has now taken these concerns into account, agreeing with the government that the accounts and activities of a group of businessmen and charities should be quietly monitored. Names would not appear on Treasury lists before convincing evidence is provided to Saudi authorities.

Meanwhile, although few Gulf nationals might agree with one UAE banker who holds that "99 percent of Gulf Arabs are supporters of Osama bin Laden", Gulf Arab disenchantment with the US runs from top to bottom.

"Without a fundamental change in US attitudes to Israel and the Palestinians," said a Dubai businessman and former diplomat, "regional resistance to US arm-twisting will undoubtedly stiffen."