The Thai military has launched an investigation into the alleged theft of covert U.S. funds earmarked for Cambodian guerrillas and handled by Thai officers, a newspaper report said Monday.

The Nation newspaper, quoting diplomatic sources, confirmed earlier news reports that a U.S. government audit in July uncovered the loss of $3.5 million in the $12 million covert program.The newspaper said U.S. Ambassador William Brown brought the audit to the attention of former Prime Minister Prem Tinsulonanda just before Prem left office Aug. 9.

Prem instructed Army Commander-in-Chief Gen. Chavalit Yongchaiyudh to investigate allegations that Thai military officers took the money.

U.S. Embassy spokesman Ross Petzing declined to answer questions about the allegations.

"We do not comment on allegations of covert operations," he said.

The covert aid reportedly was designed to build up non-communist Cambodian guerrillas who are fighting to oust the Vietnamese army from Cambodia.

Cambodian rebels use the Thai border as a base to stage hit-and-run attacks against Vietnamese troops and soldiers of the Hanoi-installed Cambodian government.

The allegations of corruption were made in an article Sunday by The Washington Post and in the Oct. 27 edition of the Far Eastern Economic Review magazine.

The Post said Thai officers responsible for funneling supplies across the Thai border to the Cambodian resistance skimmed $3.5 million from $12 million earmarked for the guerrillas.

It said the alleged theft was uncovered just as U.S. officials were planning to increase the amount of covert aid. Because of the missing money, the covert program was reduced to $8 million for fiscal year 1989.