WASHINGTON, Oct 23 (Reuters) - The Obama administration on Thursday threatened to slap sanctions on anyone buying oil from Islamic State militants in an effort to disrupt what it said was a $1 million a day funding source.

Islamic State has seized large swaths of Iraq and Syria in a brutal campaign, and could pose a threat to the United States and its allies if it is not stopped, U.S. Treasury Undersecretary David Cohen said.

“With the important exception of some state-sponsored terrorist organizations, ISIL is probably the best-funded terrorist organization we have confronted,” Cohen said, referring to another name for Islamic State. His remarks were prepared for delivery at the Carnegie Endowment for International Peace.

Islamic State (IS) is generating tens of millions of dollars a month through a combination of oil sales, ransom, extortion and other criminal activities and support from wealthy donors, Cohen said in laying out the most comprehensive outline yet of the U.S. financial strategy against the group.

Oil in particular is a key funding source, he said. IS has tapped into the black market in oil in Syria and Iraq, refining some and selling it to smugglers who transport it to Turkey and the Kurdish region of Iraq.

Cohen, the Obama administration’s point man on sanctions, said the Syrian government, which has been fighting a long civil war against opposition forces, has also apparently agreed to buy oil from IS.

He said some recent air strikes by the United States and others have destroyed some refineries controlled by IS, disrupting its oil revenue, but it was still important to find other ways to target the group’s funding sources and prevent access to the formal financial system.

“The middlemen, traders, refiners, transport companies, and anyone else that handles ISIL’s oil should know that we are hard at work identifying them, and that we have tools at hand to stop them,” Cohen said.

U.S. sanctions block people and firms from accessing the U.S. financial system, and are usually followed by banks around the world who are wary of dealing with U.S. enemies.

The United States will also seek to disrupt other IS funding activities, including an estimated $20 million made from kidnapping people for ransom this year.

“If we are to protect our citizens and avoid bankrolling our adversary, every country must adopt and implement a no-ransoms policy,” Cohen said. (Reporting by Anna Yukhananov; Editing by Tim Ahmann)