"Senior Afghan and U.S. diplomatic, military and intelligence officials, including several who had roles in creating the programme, described its details and said that resources provided by the U.S. were used to support it," the report said.
A US drone strike close to Pak-Afghan border claimed to have killed Taliban leader Mullah Akhtar Mansur though Pakistan has not yet confirmed, if he was killed in the attack last week.
According to the report the Afghan intelligence agency was leading the drive to "recruit new Taliban assets."
"The agency relies on the U.S. for most of its funding and is still mentored by the Central Intelligence Agency."
The CIA declined to comment for this article, the WSJ report said.
The United States has invested billions of dollars in reconstruction efforts in Afghanistan but the country still depend on aid for most of its funding and the US pays more than $4 billion a year for its security forces.
The goal of funding the breakaway faction of Taliban is to exploit divisions that emerged after the death of Taliban leader Mullah Mohammad Omar. The programme targets southern Zabul, Helmand, eastern Paktika and western Farah and Herat provinces, where groups of insurgents and their commanders, unhappy with the Taliban's leadership, have defected to a commander named Mullah Mohammad Rasool.
"Afghan and U.S. officials said Mullah Rasool's faction and other fractious Taliban groups have been receiving cash, ammunition and weapons from the Afghan government ," the report said.
A spokesman for Afghan President Ashraf Ghani denied if there was any alliance between any Afghan agency and any Taliban group."
"The Afghan government does not support any Taliban groups and we categorically reject such claims as baseless," the report said quoting spokesman, Sayed Zafar Hashemi.
"In response to queries about coalition resources and facilities being used to assist Mullah Rasool's group, a coalition spokesman said it was "possible that the breakaway Taliban factions have been able to acquire some"weapons or other equipment, but they weren't given to the insurgents "directly or indirectly," according to the report.
"The programme carries significant risks. Recruited Taliban commanders, who have yet to commit to peace talks with the government, may turn against Afghan and foreign forces in the country with the ammunition supplied to them," the report said quoting Afghan and U.S. security officials.