The money was approved in 1999 by the Department of Housing and Urban Development. The facility was to be adjacent to Bais Yaakov, a Jewish day school in Brooklyn that Balkany directs, the complaint said.

But investigators said they later discovered Balkany had diverted the money — including $300,000 to an Israeli company where his son-in-law is an officer and $5,000 to a New York import company where another son-in-law is president.

Balkany also used thousands of dollars of the grant money to pay his own life-insurance premiums, credit-card bills and his own federal income taxes, prosecutors said.

Outside court, Balkany lawyer Benjamin Brafman said the rabbi was innocent.

''People who know Rabbi Balkany will recognize that these charges are simply not true,'' Brafman said. ''He has a reputation for being scrupulously honest. He did not personally profit in any way.''

The rabbi surrendered to authorities Tuesday morning and was later released on $750,000 bail. He did not enter a plea, and U.S. Magistrate Judge Gabriel W. Gorenstein set a Sept. 25 hearing.

Balkany, a 57-year-old Orthodox Jew, helped start Bais Yaakov 35 years ago and his been a respected lecturer, educator and community leader ever since, his lawyer said.