"I think there is change afoot in the Mideast," said James Clapper, director of national intelligence, referring to perceptions of the IS group in the region.
"It's not going to occur overnight. But I think these brutalities, publicized brutalities by ISIL (IS), beheadings, immolation and the like, have really had a galvanizing effect even in the Mideast," Clapper said at an event in New York organized by the Council on Foreign Relations.
As a result, donations to the extremists in Islamic countries were dropping off, according to Clapper.
"There's been a big decline," he said.
But he added that private donations accounted for "less than one percent" of the group's income, with most of its revenue coming from bank robberies, extortion and oil smuggling in areas under IS control.
The United Arab Emirates, Qatar, Saudi Arabia and other Sunni-led states have long been accused of allowing donations to flow to Islamist extremists in Syria, but those countries have denied the allegations.
Vice President Joe Biden had to issue an apology to UAE, Turkey and Saudi Arabia last year after he suggested that their governments sent money and weapons to Sunni militants fighting the Syrian regime.
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Clapper also said the IS group was adept at propaganda and that a "counter-narrative" was needed to defeat the jihadists.
The conflict would be decided ultimately by winning "hearts and minds" and "a counter-narrative starting with education," he said.
The US spy chief expressed concern about IS militants recruiting fighters from among the huge numbers of refugees who have fled the conflict in Syria.
Millions of refugees have put a "huge strain" on neighboring Lebanon, Jordan and Turkey, and often are living in grim conditions, he said.
The pool of refugees creates an "environment for recruiting" volunteers for the IS, he said.
"That's a great concern that I have."
His comments came after the United Nations last week warned Syria's refugee crisis was approaching a "dangerous turning point."
Close to 12 million people have been displaced by the four-year war in Syria, including 3.8 million who have fled to neighboring states.