The cash was given to an Islamic bookshop operated by bombers Mohammed Siddique Khan and Shehzad Tanweer who spent it on propaganda videos glorifying Jihad.
It also funded computers, gym equipment and the notorious rafting trip to North Wales made by the pair a month before the attacks on London in 2005, which killed 52 and maimed hundreds.
Relatives of those who died in the atrocity claimed Children in Need was hampered from asking about the money for fear of causing offence to Muslims.
Children in Need Chief Executive David Ramsden last night said he was 'extremely concerned' and ordered an investigation.
But he insisted the charity had had no idea the money was being used to fund terrorism.
The £20,000 was part of an award made to Leeds Community School in the Beeston area of the city
The school was awarded just short of £250,000, of which £20,000 came from Children in Need and was given between 1999 and 2002.
Along with the school, the money also paid for the adjoining Iqra bookshop, which was run by the bombers and was the first place they came together to hatch their plans.
Children in Need and Leeds Council thought they were funding educational work for local children.
Children in Need Chief Executive David Ramsden last night said he was 'extremely concerned' and ordered an investigation.
But he insisted the charity had had no idea the money was being used to fund terrorism.
The £20,000 was part of an award made to Leeds Community School in the Beeston area of the city
The school was awarded just short of £250,000, of which £20,000 came from Children in Need and was given between 1999 and 2002.
Along with the school, the money also paid for the adjoining Iqra bookshop, which was run by the bombers and was the first place they came together to hatch their plans.
Children in Need and Leeds Council thought they were funding educational work for local children.
Instead, according to Martin Gilbertson, who worked at both the bookshop and the community centre, the atmosphere was anything but educational.
'They blamed everything on the Jewish conspiracy, they hated western culture it was like living with Jihad on a daily basis', he said.
They and Khalid Khaliq, who was jailed this year for terrorism offences, were all trustess of the Beeston Iqra charity.
According to Mr Gilbertson all three made a point of persuading local authorities to hand over hundreds of thousands of pounds which they subsequently used for terror purposes.
When Mohammed Siddique Khan detonated his bomb at Edgware Road tube station one of those who died was 22-year-old David Foulkes who was on his way to a job interview.
His father Graham Foulkes, from Oldham near Manchester, said he was 'horrified' and 'staggered' Children in Need had been funding those who killed his boy. But he claimed that he knew why no questions had been asked.
His father Graham Foulkes, from Oldham near Manchester, said he was 'horrified' and 'staggered' Children in Need had been funding those who killed his boy. But he claimed that he knew why no questions had been asked.
He said: 'There is a fear of anybody putting their hands up and saying 'just a minute NO' that the community will use that as - will accuse people of being racist or islamophobic and people are so frightened of being branded or labelled with these things that the easy thing to do is just to say yes and give them the money and I think the Jihadist network know that, they manipulate that, they manage it, and they will pull the wool over our eyes'
The revelations were uncovered by an investigation carried out by BBC2's Newsnight.
Mr Ramdsen last night admitted Children in Need had given a £20,000 donation to Leeds Community School.
He said: 'I'm incredibly concerned that we did make an award to Leeds Community School over nine years ago and any allegation that any funding we’ve given to any project has been misused and not used to change the lives of disadvantaged children and young people makes me concerned and very sad.
'We take the trust that the public puts in BBC Children In Need and the fact that they provide us with their finding extremely seriously and I'm incredibly concerned but I can reassure the British public that we are very careful in who we fund and this allegation is a very rare one for us but one that causes a great deal of concern.'
'We take the trust that the public puts in BBC Children In Need and the fact that they provide us with their finding extremely seriously and I'm incredibly concerned but I can reassure the British public that we are very careful in who we fund and this allegation is a very rare one for us but one that causes a great deal of concern.'
A statement from Children In Need read: 'The grants made by BBC Children In Need to Leeds Community School, itself a charity registered with the Charity Commission, were given in good faith in 1998 and 1999.
'No evidence has been produced that the money they received was used for terrorist activity. Clearly if there is an allegation of fraud, then it is a matter for the police.
'BBC Children In Need distributes more than £30 million in grants every year, greatly benefiting disadvantaged children and young people in the UK.
'BBC Children In Need does everything it possibly can to make sure that the public money is entirely used to benefit these children.'
'BBC Children In Need distributes more than £30 million in grants every year, greatly benefiting disadvantaged children and young people in the UK.
'BBC Children In Need does everything it possibly can to make sure that the public money is entirely used to benefit these children.'
A spokesman for the Charity Commission said Leeds Community School was no longer a registered charity.
He added the Commission would assess the evidence put forward by the programme and assess whether there was any need for further action.
'All charities in England and Wales, including grant-making charities, are subject to regulation by the Charity Commission,' he said.
'Charity law sets out the scope within which charities work, charities must prepare yearly accounts showing how their funds are applied, and the Charity Commission provides extensive advice and guidance to help charities consider the sort of risks they need to address and the processes the need to have in place in order to operate.
'In this instance, we understand that Newsnight has identified concerns relating to several organisations that are or were charities.
'In this instance, we understand that Newsnight has identified concerns relating to several organisations that are or were charities.
'Once we have had the opportunity to consider the detail of the concerns raised in tonight's broadcast and the evidence that supports them we will be in a position to determine if there is any regulatory role for us in connection to this matter.'
Conservative MP David Davis said last night those who donated to charities like Children in Need had an expectation that the money would be spent well.
He said: 'The 2000 Terrorism Act laid down requirements to exercise very high levels of responsibility in this area and if you don't the confidence of the public in giving money to organisations like Children in Need will drop away.'
Mr Davis added that the Charities Commission should be making sure what purpose such monies are used for and that political correctness shouldn't play any role in who it investigates.
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