Morris Talansky told an Israeli court he did not know how the money was spent, but linked it to Ehud Olmert's "love" of "expensive" luxury goods.
Police are investigating whether the PM took up to $500,000 (£250,000) in bribes or illegal campaign donations.
Mr Olmert says sums from Mr Talansky were legal campaign contributions.
Mr Talansky made his claim during testimony under oath at the request of prosecutors, before his expected return to the United States.
"I gave [Mr Olmert] cash in envelopes," the millionaire campaign fundraiser said, according to a transcript of the hearing.
"I asked him why I couldn't write a cheque and he said it's because of the way the money is channelled."
When asked how the money was spent by Mr Olmert, Mr Talansky said: "I only know that he loved expensive cigars. I know he loved pens, watches. I found it strange."