The Times said the financial ties and close working relationship between the intelligence agency and Karzai raise significant questions about Washington's war strategy in Afghanistan, which is currently under review at the White House.
The US has stationed troops in the country since 2001 as it attempts to defeat Taliban fighters there.
"If we are going to conduct a population-centric strategy in Afghanistan, and we are perceived as backing thugs, then we are just undermining ourselves"
Major-General Michael T Flynn, senior US military intelligence official in Afghanistan
The newspaper report comes amid deepening concern about growing US troop deaths in Afghanistan, with October going down as the deadliest month since the soldiers were deployed.
The Times quoted Major-General Michael T Flynn, the senior US military intelligence official in Afghanistan, as saying: "If we are going to conduct a population-centric strategy in Afghanistan, and we are perceived as backing thugs, then we are just undermining ourselves."
The ties to Karzai have created deep divisions within the administration of Barack Obama, the US president, according to the newspaper.
The Times says that critics say the relationship complicates Washington's increasingly tense ties with Hamid Karzai, who has struggled to build sustained popularity among Afghans and has long been portrayed by the Taliban as a US puppet.
The CIA's practices, the newspaper reported, also suggest that the US is not doing everything in its power to stamp out the lucrative Afghan drug trade, a major source of revenue for the Taliban.
Several US officials the newspaper interviewed said the relationship between Ahmed Wali Karzai and the CIA is wide ranging.
The officials said he helps the CIA to operate the Kandahar Strike Force, an armed group that is used for raids against suspected Taliban fighters.
On at least one occasion, the newspaper reported, the officials said the strike force had been accused of mounting an unauthorised operation against an official of the Afghan government.
The president's brother is also paid for allowing the CIA and US Special Operations soldiers to rent a large compound outside the city - the former home of Mullah Mohammed Omar, the Taliban's founder - The Times said.
The same compound is also the base of the Kandahar Strike Force.
The newspaper quoted a senior US official, who spoke on condition of anonymity, as saying: "He's our landlord."
Paul Gimigliano, a CIA spokesman, told The Times: "No intelligence organisation worth the name would ever entertain these kind of allegations."