It is the latest in a series of covert programs that is likely to spark fresh concerns about potential privacy infringements and Americans' civil liberties.
US Treasury Secretary John Snow defended the secret finance-tracking spy program following its disclosure by several US newspapers, while Attorney General Alberto Gonzales told reporters it was "lawful".
"I am particularly proud of our Terrorist Finance Tracking Program, which, based on intelligence leads, carefully targets financial transactions of suspected foreign terrorists," Snow said in a statement.
"(If the flow of terrorist monies are) skillfully followed, they lead us to terrorists themselves, thereby protecting our citizens."
But later at a press conference, Snow said the disclosure of the program was "regrettable" saying that making its details public may weaken the war on terrorism.
"The fact that we follow the terrorists is known to everyone,” he said.
“But this is different. These disclosures go to the sources and the methods that are used. That can only help the terrorists. That can only make our job more difficult. It is a great disappointment. It is regrettable. We tried to dissuade people form running this story."
Snow said the monitoring specifically targets suspected foreign terrorists and "is not 'data mining', or trolling through the private financial records of Americans”.
The spying program, conducted by the Central Intelligence Agency and overseen by the Treasury Department, was launched after the September 11, 2001 attacks on New York and Washington.
Treasury Department Under Secretary Stuart Levey, in an interview with The New York Times, said the program "has provided us with a unique and powerful window into the operations of terrorist networks," adding that it was "without doubt a legal and proper use of our authorities."
The government agreed to reveal the existence of the program after it was unable to dissuade the Times from publishing details, the newspaper said.
The program relies on records of SWIFT (Society for Worldwide Interbank Financial Telecommunication), which is owned by more than 2,200 banks and financial organizations.
SWIFT routes millions of financial transfer instructions every day, most of them in cross-border transactions.
The searches rely on broad administrative subpoenas for millions of records from SWIFT.
That access to large amounts of confidential data has raised concerns about legal and privacy issues inside the administration, the Times said.
Treasury officials said multiple safeguards are in place to protect unwarranted searches of Americans' private banking records.
The Times said SWIFT’s database has provided clues to money trails and ties between possible terrorists and groups financing them, and directly led to the capture of Al-Qaeda operative Riduan Isamuddin, believed to have masterminded 2002 bombings in Bali, Indonesia.
It has also helped identify a US man convicted of helping an Al-Qaeda member launder 200,000 dollars through a Pakistani bank, prosecutors told the Times.