Meet the Frankenstein monster of Saudi Arabia and Qatar. Or as we know them, Isis

It seemed like a good idea at the time. Thanks to the immediacy of television, innocent civilians in Syria were writhing from gas attacks before our eyes, with the blame laid on their own government. Yet despite a red line having been crossed by this use of chemical weapons, the international community decided against air strikes on the Assad regime.

Instead we encouraged two oil-rich Arab states, Qatar and Saudi Arabia, to continue arming rebel groups to oust the ruthless dictator in Damascus. Now, thanks to those weapons, one of the groups has grown into the Frankenstein's monster of the so-called Islamic State whose brutal fighters have swept through Syria and Iraq, crucifying and beheading like a deadly inhuman tide.

Saudi Arabia has been a major source of financing to rebel and terrorist organisations since the 1970s, thanks to the amount it has spent on spreading its puritan version of Islam, developed by Mohammed Abdul Wahhab in the 18th century. The US State Department has estimated that over the past four decades Riyadh has invested more than $10bn (£6bn) into charitable foundations in an attempt to replace mainstream Sunni Islam with the harsh intolerance of its Wahhabism. EU intelligence experts estimate that 15 to 20 per cent of this has been diverted to al-Qa'ida and other violent jihadists.

The only other official Wahhabi country is Saudi's Gulf neighbour Qatar, which is, per capita, the richest country in the world. It likes to paint itself as a more liberal and open version of the Muslim sect. Its newest and biggest mosque is named after Wahhab, but this is the fun, football-loving version.

The Qataris are Barcelona's shirt sponsors, the owners of Paris St-Germain and, albeit amid allegations of dodgy financial footwork, will host the 2022 World Cup – to which, to the horror of their Saudi neighbours, women will be admitted.

In Qatar, unlike Saudi, women are allowed to drive and travel alone. Westerners can eat pork and drink alcohol. There is no religious police force or powerful class of clerics to enforce morality. Qatar's Al Jazeera television network stands in contrast with the region's state-controlled media, and the Qataris are investing in the West, including the Shard, Harrods and big chunks of Sainsbury's and the London Stock Exchange.

But that is not the crucial difference. Where the Saudis tend to support restrictive strong-man regimes like their own across the Arab world, the Qataris, throughout the Arab Spring, have backed grassroots Islamists such as the Muslim Brotherhood in Egypt. The tiny country has given $200m to Hamas, which is constantly firing low-grade rockets from Gaza into Israel. It is more open-minded towards the Shia Muslims of Iran and Hezbollah in Lebanon, whom the Saudis see as enemies. It even has good relations with the Taliban.

And it has been the biggest funder of the Syrian rebels, with sources in Doha estimating it has spent as much as $3bn in Syria alone – 70 military cargo flights were sent in the past two years – in an attempt to develop networks of loyalty among rebels and set the stage for Qatari influence in a post-Assad era. Riyadh sees its tiny neighbour – "300 people and a TV channel", as one Saudi prince dismissively said – as a troublesome and dangerous gadfly.

The result of all this is that Qatar and Saudi have channelled funds, arms and salaries to different groups in Syria. Until last year they were creating rival military alliances and structures. But their efforts at discrimination have been in vain. On the ground the rebel groups have been porous, with personnel switching to whichever was the best supplied. Fighters grew their beards or shaved them off to fit the ideology of the latest supplier. Many moved to whichever group was having most success on the battlefield. Key Qataris and Saudis felt it didn't matter as long as the result was the fall of Assad. But eventually two of the most extreme groups began to dominate, and eventually one of them, Jabhat al-Nusra, lost dominance to the other, Isis – the ruthless and potent force which has declared itself the Islamic State.

Only towards the end have the funders realised the error of their strategy. The Qatar government has stemmed the flow of funds. At first it believed it could change the ideology of those it funded once the war against Assad was over.

But now it realises it was creating a sleeping monster, as the Saudis had done when they financed the Taliban to fight the Soviets in the 1980s. In April, the Saudis sacked the head of their intelligence services, Prince Bandar bin Sultan, who had been responsible for the details of arming the Syrian rebels. His blunders led to the massive empowerment of the kind of grassroots Islamism which is the greatest threat to the Saudi claim to be the leader of global Islam because of its vast wealth and its custodianship of the holy city of Mecca.

They have left it too late. The genie is out of the bottle. Some funds continue to flow from wealthy Qatari individuals and from conservative Saudi preachers collecting funds through their television shows. But the terrorists of the Islamic State, who were earning $8m a month from a Syrian gas field where they have established robust logistical lines, have added a further $1m a day from the half dozen Iraqi oilfields they have seized. Worse still, the conflict in Iraq has solidified into religiously defined ethnic identity lines.

As Washington has now realised, the Islamic State will have to be stopped militarily. But real progress to re-civilise the cradle of civilisation which was Mesopotamia will require countries such as Saudi Arabia and Qatar – as well as the West, Iran, Israel and Syria – to make some hard decisions about the hierarchy of evil and where their greatest enemy lies.