An official inquiry is to be held in Israel into how Prime Minister Ariel Sharon came to approve a controversial prisoner swap with Hezbollah.
Sharon's popularity has plunged since the Tannenbaum case
State Comptroller Eliezer Goldberg said he would examine the deal in which 400 Arab prisoners were exchanged for Israeli businessman Elhanan Tannenbaum.
Last week, Israel's Maariv newspaper said Mr Sharon had employed the father-in-law of the former hostage.
Mr Sharon has said he was not aware of any such link when he lobbied the deal.
The move comes as Mr Sharon - who is at the centre of two other corruption scandals - is facing plunging personal approval ratings, according to Israeli media.
Mr Tannenbaum was freed in January after spending three years in captivity.
Since his return to Israel, he has been held in custody for questioning over the business deals he was involved in at the time of his abduction by Hezbollah in Dubai.
Mr Tannenbaum insists he was kidnapped after a drug-deal went wrong, but investigators suspect the army reserve colonel might have been working for Hezbollah.
Mr Goldberg "has decided to investigate the process by which the decision to approve the prisoner exchange deal... was made," a statement from his office said.
The circumstances of the ex-hostage's capture remain unclear
"The state comptroller will decide on the scope of the investigation during the inquiry," the statement added.
Israel's State Comptroller's reports are advisory in nature.
On the basis of his findings, the comptroller can recommend the opening of a state inquiry or refer suspicions of criminal activity to the attorney general for possible indictment.
Opposition groups have been pressing for a full parliamentary enquiry.
Last week, Maariv said Mr Sharon hired Shimon Cohen to run his farm after being appointed minister of agriculture in 1977.
Mr Cohen's daughter, Esther, was married to Mr Tannenbaum. The couple have since separated.
Many Israelis questioned why Mr Sharon made such a determined effort to secure the release of Mr Tannenbaum, who has admitted trying to conduct an illicit business deal with Hezbollah.
Mr Sharon told reporters on Wednesday he did not know Mr Cohen was related to Mr Tannenbaum when he managed to secure the deal by a single-vote majority in the cabinet.
"I didn't know his family ties, I still don't know today how many sons-in-law or daughters-in-law or former sons-in-law he has," he said.
"This is a wild attack of the sort I've never seen before."
January's exchange deal also included the release of the bodies of three Israeli soldiers in exchange for 59 dead fighters, mostly of Hezbollah, after months of painstaking negotiations.