Militants have begun reopening lucrative emerald mines which had been closed by the government, since they took full control of the poor but picturesque region in the north of the country under a controversial peace deal last month.
They are using revenue from the sale of the emeralds to help finance attacks on Nato forces in neighbouring Afghanistan, and to support their drive to extend harsh sharia, including public whippings and summary executions, into more regions of Pakistan.
Swat holds one of Asia's two largest-known deposits of high quality emeralds, from where the precious stones are smuggled to Jaipur, India, and transported to Bangkok, Switzerland and Israel. Here they are cut and polished into the lustrous gems that adorn the world's finest jewellery, sold to unsuspecting customers who have no idea that the money they are spending may end up financing the Taliban.
"We receive one third of the profit, the rest goes to the workers," Muslim Khan, the Taliban spokesman in Swat, told The Sunday Telegraph.
"We know that all the minerals have been created by Allah, the mighty and the merciful, for the benefit of his creatures. We should avail the opportunity."
The revelation that the Taliban are making huge profits from the emeralds will heighten fears among Pakistan's middle class that their country is on a slippery slope to religious zealotry and Islamic rule. Millions of ordinary Pakistanis are afraid of the slide towards anarchy that appears to have begun. Evidence of the militants' growing stranglehold emerged last week in a gruesome video showing a 17-year-old girl screaming as she is beaten by Islamic radicals in Swat.
The unlicensed trade in the region's emeralds provides the Taliban with cash to buy weapons for their struggle against Pakistan's secular government, just as the Taliban in Afghanistan has thrived on the proceeds of the opium trade.
Brig Mahmood Shah, the former chief of security for Pakistan's tribal areas, said: "The Taliban use drug money for jihad in Afghanistan. The same thing is now happening in Swat. Money from emeralds is sponsoring their so-called jihad."
The flow of emeralds promise to provide a rising stream of cash as the Taliban open more mines. Abdul Karim Shah, director of the Gems and Gemological Institute in Peshawar, estimated that the Taliban could already earn up to £2 million a year from the mines now operating, with more to come as emerald deposits potentially worth millions are tapped into.
One newly reopened mine, near the Swat capital, Mingora, had been sealed since 1998 because of a legal dispute between the government and a contractor. Now workers use picks and shovels to dig for emeralds, excavating dozens of new pits and creating a cratered landscape. "We have given instructions to workers to lessen the amount of destruction," said Wahidullah Khan, a Taliban soldier at the mine.
About 70 Taliban recently occupied another emerald mine in the Shangla district near Swat, a government mining official said. Taliban gunmen forced out local officials and hired their own workers, who were promised a 50 per cent share of the profits.
"They have engaged 1,000 people and the number is increasing," a Taliban commander said. "It is a great opportunity for the people, as there is so much poverty and unemployment here."
One of the workers who is benefiting, Shad Ali, 24, said: "I earn at least Rs1000 (£8) per day. When I find a stone during digging, I take it to the Taliban's office here. It's weighed there and my share of the price is given to me." He said the mine had proved a "blessing" to poor people in the area.
Emerald mines in Pakistan and Afghanistan are thought to contain nearly 10 per cent of the world total, and during the 1980s the mines of Swat yielded a quarter of a million carats of emeralds - worth £15 million in rough, uncut form.
A government mining official in the area, who is powerless to enforce the government's writ, said: "If the Taliban continue selling the emeralds they will become very strong and it will be impossible for the government to dislodge them."