Buying knockoff designer handbags and Hello Kitty T-shirts on city street corners may ultimately be helping terror groups like Hezbollah (search) and Hamas (search), law enforcement officials and experts testified Wednesday.

Profits from faux Chanel, Louis Vuitton and Prada purses, scores of pirated DVD movies, and counterfeited clothing and other goods have been traced to supporters of terror organizations, the experts said.

"We have encountered suspects who have shown great affinity for Hezbollah and its leadership," Lt. John Stedman of the Los Angeles Sheriff's Department testified at a Senate Homeland Security Committee hearing.

In one example, Stedman said, a counterfeiting suspect had hung small Hezbollah flags and a picture of the group's leader in his home. In another, the suspect had a Hezbollah tattoo on his arm.

Hezbollah's terror capabilities equal those of Al Qaeda (search), and "anything they do to fund their activities should be of our concern," said terror expert Matthew Levitt, a former FBI (search) intelligence official.

Levitt said the FBI also believes Hamas deals in counterfeit and pirated goods, including cigarettes and computer software.

It is unclear how widespread terror involvement in selling counterfeited goods may be, and the examples given at Wednesday's hearing were largely anecdotal.

But authorities believe terror groups have become more involved in counterfeit sales after the United States cracked down on terror financing schemes wired through banks and charities.

"Each time one avenue is closed down, another one is exploited by ever-resourceful terrorist groups," said Sen. Susan Collins, R-Maine, who chaired the hearing. "And counterfeiting, because it is extremely lucrative and easy to get into, is the mechanism that terrorist groups have discovered, and are exploiting."

American businesses lost up to $250 billion annually from knockoffs, Collins said. The U.S. Customs and Border Protection seized $138 million in counterfeited goods last year, up from $94 million in 2003, she said.