China has uncovered widespread misappropriation of 16.9bn yuan (£1.7bn) of funds from its state lottery programme, underscoring the extent of official corruption, which the government is trying to root out.

Funds were misappropriated through the buying and building of office buildings and hotels or embezzled, China’s national audit office said in a report on its website.

The state auditor said the irregularities accounted for a quarter of the total of lottery funds received in its 2012-14 investigation, which spanned 18 provinces. It said 17 provinces had flouted the law by engaging in lottery sales over the internet without approval from the finance ministry.

In another case, 32 lottery shops had used 3.1bn yuan to construct office buildings, training centres and hotels, the report said.

Spurred by rising disposable income, a strong appetite for gambling and more sophisticated games, China’s lottery market has boomed, with customers splurging billions of dollars. China is expected to overtake the United States as the world’s biggest lottery market this year.

The government has so far contained casino gambling to Macau, in part because of social concerns. Experts say officials consider the lottery system more sanitised, with fewer negative effects on citizens.

The review comes as President Xi Jinping’s government wages a fight against corruption, warning that the problem is so bad it could affect the Communist party’s grip on power.

Lottery products are typically sold in the form of paper tickets from authorised outlets throughout the country. These range from dedicated lottery stores to counters in supermarkets, post offices and petrol stations.

Unlike the US and Europe, where prizes can climb into the hundreds of millions of dollars, China caps jackpots at 10m yuan. Tickets sell for 2 yuan to 200 yuan, with proceeds supporting sports and welfare charities.