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He said the U.S. has known about the Iranian assistance for years and that Washington also gives the palace cash payments.
Karzai's comments came in response to a The New York Times report a day earlier that Iran was giving cash to the Afghan president's chief of staff, Umar Daudzai, to buy his loyalty and promote Iranian interests in Afghanistan.
Cash payments "are done by various friendly countries to help the presidential office and to help the expenses," Karzai said at a news conference in Kabul, according to the AFP news agency.
"The government of Iran has been assisting us with five or six or seven hundred thousand euros [$700,000 to $975,000] once or twice every year, that is an official aid," said Karzai. "He [Daudzai] is receiving the money on my instructions."
The Times, citing unnamed Afghan officials said the payments total millions of dollars and go into a secret fund that Daudzai and Karzai have used to pay Afghan lawmakers, tribal elders and even Taliban commanders to secure their loyalty.
"It's basically a presidential slush fund," one Western official told the paper. "Daudzai's mission is to advance Iranian interests."
Iran has consistently viewed the presence of the U.S. in Afghanistan as a threat, and President Mahmoud Ahmadinejad has urged countries in the region to cooperate with one another, instead of looking to the U.S.
Karzai's comments came the same day the Iranian embassy in Kabul slammed the Times report as "ridiculous and insulting," according to the AFP.
"Such baseless speculations are being spread by some Western media outlets in order to confuse public opinion and damage the strong ties between the governments and nations of the Islamic republics of Afghanistan and Iran," the embassy said in a statement.
NewsCore contributed to this report.