By SEBASTIAN ABBOT
The Associated Press
Sunday, June 13, 2010; 10 : 20 AM

ISLAMABAD -- Pakistan's main spy agency continues to train, fund and arm the Taliban despite U.S. pressure to sever ties with the group that Islamabad helped rise to power in Afghanistan in the 1990s, said a research report released Sunday.

The findings could raise tensions between Pakistan and the U.S., which has provided billions of dollars in military assistance to Islamabad since 2001 to help fight the Taliban. U.S. officials believe Pakistan's support is key to defeating the insurgency.

But the country's powerful Inter Services Intelligence agency, or ISI, continues to work closely with the Taliban and is even represented on the group's leadership council, said the report, which was issued by the London School of Economics and is based on interviews with Taliban commanders, former Taliban officials, Western diplomats and many others.

Maj. Gen. Athar Abbas, spokesman for the Pakistani army, which controls ISI, rejected the report, calling it "rubbish."

"In the past, these kinds of baseless and unsubstantiated allegations have surfaced and we have rejected them," said Abbas.

He pointed out that ISI has suffered many casualties fighting militants in the country.

The Pakistan military's campaign has been focused on Pakistani Taliban battling the state, not Afghan Taliban waging war against NATO troops in Afghanistan.

Many analysts have suggested in the past that current or former ISI officials have maintained links to the Taliban. But the report offers one of the strongest cases that assistance to the group is official ISI policy, and even extends to the highest levels of the Pakistani government.

"Pakistan's apparent involvement in a double-game of this scale could have major geopolitical implications and could even provoke U.S. countermeasures," said the report, which was written by Matt Waldman, a fellow at Harvard University's John F. Kennedy School of Government.

"Without a change in Pakistani behavior it will be difficult if not impossible for international forces and the Afghan government to make progress against the insurgency," it said.

One of the most surprising allegations in the report is that Pakistani President Asif Ali Zardari and a senior ISI official visited some 50 high-ranking Taliban fighters this spring being held at a secret prison in the country and told them they were only arrested because of U.S. pressure.

Zardari reportedly told them they would be released and that Pakistan would help support their operations, according to a Taliban member who was one of around a dozen insurgents set free just three days after the president's visit.

Zardari's spokesman was not immediately available Sunday to respond to that claim.

"It is hard to see how the international coalition can continue to treat Pakistan as an ally and 'effective partner,'" said the report. "However, an aggressive American response to Pakistan's conduct is only likely to generate further instability, especially given the army's ongoing battle against Pakistani militant groups and widespread anti-American sentiment among the population."

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