UPDATE 1-US firms channeled funds to blacklisted Chinese companies, says House panel

(Recasts throughout to change sourcing, adds BlackRock response in paragraph 8)

By Pritam Biswas and Mehnaz Yasmin

April 18 (Reuters) - American financial institutions facilitated investments worth billions of dollars in index funds that included several blacklisted Chinese companies, according to a bipartisan House Committee investigation.

The firms funneled $6.5 billion last year to some 63 Chinese companies flagged by the U.S. government, the probe report unveiled on Thursday said.

Ties between the U.S. and China, the world's two largest economies, have been strained in recent years due to issues including Taiwan, the origins of the COVID-19 pandemic, allegations of spying, human rights issues and trade tariffs.

The Select Committee said it focused on two companies — the world's foremost index provider, MSCI , and the world's largest asset manager, BlackRock ,— and also canvassed the broader financial industry.

The committee, in its report, concluded that MSCI indexes alone channeled $3.7 billion and BlackRock invested at least $1.9 billion in these red-flagged entities.

"BlackRock and MSCI are not alone - a cross-industry review revealed that other major index providers and asset managers funnel billions of dollars to the same red-flagged entities," the report said.

The panel, however, said the activity was not illegal.

"The Committee and its report confirm BlackRock complies with applicable US laws, this matter affects the entire asset management industry, and that Congress and the Administration must work together to create clear rules of the road for U.S. investors," a BlackRock spokesperson said in a mailed statement to Reuters.

"Despite fully cooperating with the Committee for more than eight months, its report includes misleading assertions about index funds, including that they are 'funneling billions of dollars' to these entities," the spokesperson added.

MSCI did not immediately respond to requests for comment and the committee could not be immediately reached.

(Reporting by Mehnaz Yasmin in Bengaluru; Editing by Arun Koyyur and Sriraj Kalluvila)

((Mehnaz.Yasmin@thomsonreuters.com;))