"It appears that this involvement goes beyond merely turning a blind eye to these organizations' less savory activities," said the cable released by whistleblowing website WikiLeaks.
"At worst, these accounts suggest that top leaders of its security establishment may be providing direction to these paramilitaries."
Blake is currently the US Assistant Secretary for South and Central Asian Affairs.
While some military commanders wanted to crack down on the paramilitary groups, the cable cited sources as saying Defence Secretary Gotabhaya Rajapakse -- the brother of President Mahinda Rajapakse -- had ordered them not to interfere.
The order was made "on the grounds that they are doing work that the military cannot do because of international scrutiny," it said.
The groups identified in the cable were seen as helping the government in their long struggle against Tamil Tiger rebels, kidnapping and killing suspected Tiger collaborators.
In return the authorities allowed the paramilitaries to fund their activities through illegal means, including extortion and prostitution.
While acknowledging the absence of any "smoking gun," Blake said the weight of evidence pointed to a pattern of government complicity "on multiple levels."Government forces finally defeated the Tiger rebels last year, ending their four-decade campaign for an independent homeland.