The Treasury, Ministry of Defence and Department for Education have all dipped into a fund designed to help Armed Forces charities cover shortfalls in their own budgets, it has emerged.
Over the past five years ministers have taken a third of the cash collected from fines paid by banks over the Libor interest rate-rigging scandal, according to an investigation by The Sun.
Former chancellor George Osborne announced in 2012 that the £973m raised from the fines would be given to "Armed Forces and Emergency Services charities".
But instead, ministers have used £326m of the cash themselves to pay for their own defence-related projects, including improving Army barracks, installing sports facilities on military bases, funding wounded veterans’ rehabilitation centres and buying air ambulances.
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Funding in those areas is supposed to come from taxpayers in line with normal government spending.
Tory MP and former Army captain Johnny Mercer, who is a member of the Defence Select Committee, said: "The amount that has been wasted here is almost criminal. A strategic opportunity has been lost, and I feel very bitter about it.
"This is vital public money, that George Osborne specifically targeted at a certain group who have served this country, not to bail out budgets elsewhere.
"I am going to ask the defence committee if we can conduct a full inquiry into what happened to the Libor fund."
Shadow defence secretary Nia Griffith said: "We know that the defence budget is in a complete mess, but this does not justify ministers plundering money that was meant for charity to plug gaps in the MoD’s books.
"I will be writing to the defence secretary to demand an urgent explanation of why this has happened and a guarantee that this scandal will not be repeated."
A Treasury spokesman said: “Money given to departments since 2012 from these fines is ring fenced to be spent on worthy causes.
"Funding for centres and facilities is consistent with supporting good causes and making a difference to the Armed Forces community."