The company under investigation is a subsidiary of Samsung Electronics

The investigation into Samsung Electro Mechanics comes as part of a wide-ranging probe into a scandal over donations to political parties.

Another conglomerate, SK Group, is accused of channelling millions of dollars to politicians in the run-up to last year's presidential elections.

The slush fund scandal has already affected all three main parties.

Shares in Samsung Electro Mechanics fell by 6.7% in Monday's trading after details of the raid at the company's offices in Suwon City emerged.

Shares in its parent company, Samsung Electronics, lost 2.7% of their value.

The South Korean news agency Yonhap News reported that the subsidiary was under suspicion for allegedly stashing away illegal political funds by falsifying the value of transactions with a sub-contractor.

The agency also quoted prosecutors as saying they would be publishing a full list of companies under investigation in the slush fund scandal by the end of this week.

Other big chaebols, the family-run businesses that control much of the economy, are expected to join Samsung and SK on the list.

A subsidiary of another chaebol, LG, was raided last week.

Referendum

The scandal has already threatened the country's presidency after prosecutors charged Choi Do-sul, a confidant and former aide to President Roh Moo-hyun, with taking hundreds of thousands of dollars from SK.

Other politicians have also admitted accepting money from SK.

The BBC's Charles Scanlon in Seoul says the scandal has exposed the depth of the corrupt links between government and big business in South Korea.

Even though Mr Roh is not implicated in the scandal, he has announced he will submit to a referendum after a difficult eight months in office dogged by a hostile Congress and media, and has promised to step down if he loses.

The president is currently without a power base in the National Assembly. He split from his own party, the MDP, in September, after it was wracked by mass defections to other parties.

An MDP splinter group of Roh loyalists holds just 42 seats, compared to the 149-seat majority the GNP enjoys.