The Electoral Commission is investigating whether Momentum, the left-wing group backing Jeremy Corbyn, broke election spending rules.
The watchdog announced it had opened a probe into whether the organisation spent above limits and failed to submit “accurate donation information”.
“Questions over their compliance with the campaign finance rules at June’s general election risks causing harm to voters’ confidence in elections,” said Bob Posner, the Commission’s director of political finance.
“There is significant public interest in us investigating Momentum to establish the facts in this matter and whether there have been any offences.”
The allegations are a blow to Momentum and to the Labour leader, after its staunch support helped propel Mr Corbyn to take a firm grip on the party.
The group was founded in 2015 by Jon Lansman, the veteran left-wing activist, to prevent moderate Labour MPs from unseating him, or resisting Mr Corbyn’s leftward policy shift.
It has since grown to be hugely powerful, with networks across the country and members elected to key positions in local constituency parties and on the ruling National Executive Committee (NEC).
Mr Lansman himself is expected to grab one of three new seats on the NEC open to constituency members, in upcoming elections.
The Commission said the investigation would examine whether Momentum:
* Spent “in excess of the spending limits for an unauthorised non-party campaigner” at the June general election.
* Submitted a return that “did not include accurate donation information”.
* Submitted a return that “was not a complete statement of payments made in respect of controlled expenditure”.
* Submitted a return that “did not include all invoices for payments of more than £200”.
The watchdog said it was “possible” the inquiry would identify other potential breaches of the Political Parties, Elections and Referendums Act 2000 (PPERA).
The Commission’s briefing note set out how “non-party campaigners” are allowed to undertake “targeted spending”, but only within prescribed limits.
They are £31,980 in England, £3,540 in Scotland, £2,400 in Wales and £1,080 in Northern Ireland – limits which apply in the year leading up to the 8 June election.
The note says: “Registered non-party campaigners are only entitled to spend above these limits if they have the authorisation of the political party that they are promoting.
“If that party provides authorisation, the registered non-party campaigner can spend up to the limit authorised by the political party.
However, it adds: “Should the party provide authorisation for a higher spending limit, any spending by that non-party campaigner up to that limit would count towards the party’s national spending limit.”
But a Momentum spokesman downplayed the investigation, insisting it centred on “administrative errors that can be easily rectified”.
“Momentum put a lot of effort and resources into detailed budgeting and financial procedures during the election to ensure full compliance,” he said.
Separately, the Commission is already investigating both of the groups behind last year’s Leave campaign in the Brexit referendum over spending.
It is examining whether Vote Leave, the group fronted by Boris Johnson and Michael Gove, spent more than the £7m limit.
And it launched into an investigation into whether donations and loans from the Leave-Eu campaigner Arron Banks, and one of his companies, broke campaign finance rules.