By Jason Lange

WASHINGTON, Jan 10 (Reuters) - An internal World Bank watchdog criticized the lender on Friday for not doing enough due diligence on a loan made to an Honduran company that is purportedly linked to multiple killings and drug trafficking.

The watchdog said the bank's International Finance Corporation (IFC), which aims to spur private investment in poor countries, should have more carefully researched Tegucigalpa-based Corporacion Dinant before approving the $30 million loan program.

A report by the IFC's Office of the Compliance Advisor Ombudsman (CAO), said in a report that a standard news article search required by World Bank rules would have turned up accusations that Dinant's owner had masterminded the murder of an environmental activist and that his properties were staging posts for drug traffickers.

The CAO said it had not tried to verify the reports and noted that the businessman had been acquitted of murder charges, but it said the accusations should have raised red flags because they could damage the reputation of the World Bank.

"IFC staff either knew about these allegations and perceptions and failed to deal with them" or did not conduct required news searches, the CAO said, adding that its investigators had conducted news searches using the same parameters mandated by the World Bank's rules.

An Dinant official did not immediately respond to a request for comment.

The IFC approved the loan program in 2009 to help Dinant develop its palm oil and food business. The CAO launched an audit of the project in 2012.

Through the loan, IFC indirectly got involved in one of the thorniest land disputes in Central America. Dinant operates in a fertile region near Honduras' Caribbean coast that has been the site of violent clashes that have left more than 100 people dead since 2009, according to the Honduran National Commission for Human Rights.

The CAO said on Friday that since the IFC approved the loan program, there had been media reports that Dinant helped forcibly evict farmers and that "inappropriate use" of its security forces had resulted in multiple deaths.

The IFC said it took the report seriously but disagreed with some of its conclusions. It said it was working with Dinant to address the concerns raised in the report and that failure by the company to meet its obligations could lead to termination of the investment.

"The lessons from this report can help us as we increase our work in fragile and conflict-affected areas," IFC officials Oscar Chemerinski and Morgan Landy said in a letter to the CAO.