The charity watchdog is demanding an explanation from the Joseph Rowntree Charitable Trust over claims that it gave £275,000 to an organisation linked to a banned Irish republican group.
The Quaker trust's website shows a grant of £149,915 to Teach Na Failte in November 2014 and another of £125,000 in March last year.
According to the Times, the organisation is linked to the Irish National Liberation Army (INLA), a paramilitary splinter group responsible for some of the most infamous attacks of the Troubles, including the killing of Conservative MP Airey Neave in 1979.
The Charity Commission is seeking a response from the Rowntree trust to the claims made in the paper.
Michelle Russell, the commission's director of investigations and enforcement, said: "Our guidance makes clear that charities need to take steps to carry out appropriate due diligence on organisations applying for grants, must ensure grants are only for activities and outcomes that further the charity's purposes and decisions made are in charity's best interests.
"Charities should be able to explain and justify their funding decisions. We have asked the charity to do this."
The commission added that it would "not hesitate" to take action if needed.
It previously stepped in to urge the Rowntree trust - which is in no way connected with the Joseph Rowntree Foundation - to stop funding the controversial advocacy group Cage following a public outcry over Islamic State killer "Jihadi John" in 2015.
Cage's then research director Asim Qureshi claimed the executioner - widely identified as London student Mohammed Emwazi - was an "extremely kind" and "extremely gentle" man.
The Joseph Rowntree Charitable Trust said it has worked to end violence in Northern Ireland for more than 40 years and funds groups "transitioning from violence in loyalist and republican communities".
The organisation insisted it "has no relationship with any armed groups or proscribed organisations, including the INLA".
A statement said: "Teach na Failte is recognised by HMRC as a charitable body. It provides a range of peace-building community initiatives including support for INLA ex-prisoners and their families.
"Teach na Failte has been a key player in the INLA ceasefire and decommissioning process.
"It has been recognised for its positive contribution to peacebuilding and the re-integration of former prisoners in Northern Ireland.
"INLA declared their armed struggle over in October 2009 and publicly confirmed they had decommissioned their weapons in February 2010.
"In November 2014 JRCT awarded a grant of £149,915 specifically for the 'Transition Initiative' project.
"In March 2017 the trust awarded a further grant of £125,000 to Teach na Failte to continue this work.
"This grant was for the 'Transitional Initiative' project to support peacebuilding, dialogue and conflict transformation strategies in the Bellaghy and Strabane area.
"We are content with the progress being made by the project which is subject to strict monitoring processes by the trust.
"Teach na Failte in Bellaghy and Strabane are undertaking important transitional peacebuilding work and have recently begun a new collaborative project funded under the EU's Peace IV funding stream."