Aspects of the US-backed International Fund for Ireland worried senior figures in Congress, the papers reveal.
Brian Donnelly, chairman of the influential Friends of Ireland group on Capitol Hill in Washington, issued the warning while visiting Ireland in January 1989.
According to a US embassy cable sent to the state department that month, Mr Donnelly warned then taoiseach Charles Haughey and tánaiste Brian Lenihan of a "possible erosion of support in the US Congress for future contributions to the fund".
The fund, established following the conclusion of the Anglo-Irish Agreement by Margaret Thatcher and Garret FitzGerald in November 1985, was backed by approximately IR£88 million per year.
According to the cable, Mr Donnelly said that "of specific interest" were an allocation to a branch of AIB in Strabane, Co Tyrone, worth IR£1,500 to refurbish the premises; approval of £11,000 for a betting establishment in Limavady, Co Derry; a grant of more than IR£1 million for a fisheries research vessel for the British government; rejection of a proposed educational project at Conway Mill in west Belfast; a grant for a parachute centre; and the award of IR£200,000 for an extension to a visitors' centre at the Bushmills whiskey distillery in Coleraine, Co Derry.
Mr Lenihan, the communication says, "agreed with much of Mr Donnelly's criticisms of the fund and of its director, Charles Brett, but warned that too much public criticism could become a self-fulfilling prophesy". The papers say Mr Lenihan "waffled" about the Conway Mill project.
Overall, Mr Donnelly gave broad backing for the fund and Mr Brett as chairman. News reports quoted Mr Donnelly as saying: “On the whole the fund has done a great job.”
