More than $5bn in US military aid to Pakistan has often failed to reach frontline units fighting al-Qaeda and the Taleban, the New York Times says.
The report says US aid is failing to reach the war on terror
It quoted officials saying much of the money was diverted to weapons systems designed to counter India, rather than to fighting Islamist militants.
The US provides the money to reimburse Pakistan for military operations carried out in its "war on terror".
Pakistan's military told the BBC that the report was nonsense.
Maj Gen Waheed Arshad said the reporters did not have "any information about what is happening in Pakistan".
"It is a typical New York Times report which is more nonsense than fact," he said.
He added that the Pakistani army's equipment was well-maintained and dismissed the article's claim that aid from the US had been misappropriated.
The US Congress recently voted to restrict some military aid to Pakistan. It did so to put pressure on President Pervez Musharraf to restore democratic rights.
The New York Times quoted unnamed officials in the US administration and military as saying that there were too few controls over the money.
Officials were quoted saying that the US had paid several millions of dollars to meet inflated Pakistani reimbursement claims for fuel, ammunition and other costs.
"I personally believe there is exaggeration and inflation," the newspaper quoted a senior American military official who has reviewed the programme as saying.
"Then, I point back to the United States and say we didn't have to give them money this way."
The $5bn was provided through a programme which reimburses Pakistan for conducting military operations to fight terrorism.
Pakistani officials have blamed the US for refusing to sell the country advance helicopters, reconnaissance aircraft, radios and night-vision equipment that it needs.
"There have been many aspects of equipment that we are keen on getting," Maj Gen Arshad told the newspaper in a separate interview.
"There have been many delays which have hampered this war against extremists."