Hillary Clinton's presidential campaign and the Democratic National Committee reportedly helped fund the infamous dossier alleging illicit ties between Donald Trump and Russia.
Unfounded allegations claimed Russian security services possessed highly compromising footage of Mr Trump with prostitutes in a Moscow hotel room - which could have left the then-president-elect at risk of blackmail.
The dossier also claimed that Mr Trump had colluded with the Kremlin to swing the election in his favour.
A law firm representing the Clinton campaign and the DNC hired Christopher Steele, a former British intelligence officer known for his Russian expertise, to compile the dossier, a source confirmed to NBC News.
The deal is said to have started in spring 2016 and lasted until election day.
The revelation is likely to fuel Mr Trump's claim that the allegations are politically motivated and "fake news".
The president earlier reacted to the reports on Twitter.
His press secretary, Sarah Sanders, accused the Clinton campaign of a cover-up.
Brian Fallon, Mrs Clinton's campaign press secretary, denied any knowledge of the hiring but joked that if he had known, he would have tried to help the ex-spy dig up dirt on Mr Trump.
Mrs Clinton has not commented on the report, while the DNC said its current chairman was not part of the decision to hire the investigator.
President Trump vehemently denied the allegations when they first emerged shortly before his inauguration in January, telling ITV News Washington Correspondent Robert Moore that a particular salacious part of the dossier could not have been true because he is a "germaphobe".
Investigators probing potential ties between the Trump campaign and Russia have worked to corroborate the allegations in the Steele dossier and have even travelled to interview the former spy.