David Cameron has authorised an investigation into the foreign funding and support of jihadi and extremist groups in the UK, a development that could lead to a potential standoff with the government’s key Gulf ally Saudi Arabia.

Political pressure on Cameron to investigate extremist revenue streams in the UK has come from the Liberal Democrats who requested the inquiry in exchange for supporting the extension into Syria of British airstrikes against Islamic State.

The Home Office’s new extremism analysis unit has been directed by Downing Street to specifically examine the scale and origin of funding of extremist groups in the UK with a remit to follow overseas funding streams. Home Office sources would not give details on the level of resources which will be assigned to the inquiry. Its findings will be sent directly to the home secretary Theresa May and Downing Street this spring.

The Gulf kingdom has repeatedly been accused of funding mosques and groups with links to Islamist terrorism in the west. Last month Angela Merkel’s deputy, Sigmar Gabriel, told the Bild am Sonntag newspaper that the Saudi regime posed a danger to public security through its support for Wahhabi mosques around the world. Wahhabism, a fundamentalist form of Islam practised in Saudi Arabia, has been identified by the European parliament as a driver of global terrorism.

Gabriel said: “We have to make clear to the Saudis that the time of looking away is over. Wahhabi mosques all over the world are financed by Saudi Arabia.”

Alistair Carmichael MP, the Lib Dem spokesperson for home affairs, said: “We need to do everything in our power to counter extremism at home. External funding of extremist organisations from states like Saudi Arabia needs to be investigated and cracked down on if we’re to be successful in countering this poisonous ideology.

“I am glad that the home secretary is now undertaking this work at our urging but we will need to ensure that it is properly resourced, conducted and followed through.”

Shashank Joshi, senior research fellow at the London thinktank at the Royal United Services Institute, urged the review to focus on the cash flow to extremists within the Gulf region, warning that the UK would find it challenging to mount an investigation in isolation. “I support looking into regional financial flows to extremist groups but the UK can’t do that alone, we don’t have the power to do it alone. Lots of these flows are going to be through networks that have absolutely nothing to do with the UK, for example from Emirate banks to Jordanian financial intermediaries to Lebanon into Syria. Is this review about funding into the UK or is it about the region [the Gulf]? If it’s about the UK it’s a little bit of navel gazing because that’s not really where the problem is.”