Anti-corruption campaigners and diplomats have challenged Hamid Karzai's government for awarding a $3bn oil deal to a company run by a cousin who was jailed in the United States for drug trafficking, The Telegraph reports.

Watan Oil and Gas, controlled by President Karzai's notorious cousins Rashid and Rateb Popal, won the oil extraction contract in a joint venture with a Chinese state-owned firm despite accusations another of their companies used US funds to pay protection money to Taliban commanders.

The 25-year deal gives Watan and the China National Petroleum Company access to an estimated 160 million barrels of oil from three fields in northern Afghanistan.

Up to £2 trillion of minerals, oil and gas are estimated to be beneath Afghanistan and its mineral riches are key to Western hopes the country can one day wean itself from foreign aid and pay its own way.

The oil deal in the Amu Darya Basin had been seen as a model for further fossil fuel contracts, but diplomats and activists are now concerned it heralds the carving up of Afghanistan's resources.

The selection of a group controlled by President Karzai's cousins Rashid and Rateb Popal, who served nearly nine years in jail in New York in the 1990s on drugs charges, has caused particular alarm.

The contract was awarded in December, but has seen renewed scrutiny in recent weeks as a potential source of violence in northern Afghanistan.

Watan and the Chinese have pledged to produce 150,000 barrels by the end of this year.

They won the contract against three other firms and offered far better terms than their competitors, observers said.