Although states rarely use economic sanctions specifically to combat transnational terrorism, potential targets of sanctions often face terrorist campaigns within their territory. States may avoid using sanctions against states with terrorists for fear of weakening target states excessively, thereby indirectly strengthening terrorist groups. However, this argument has not been subjected to rigorous empirical testing. This study presents a theoretical and empirical examination that explores how the imposition of sanctions affects the dynamics of ongoing terrorist campaigns in the targeted state. We argue that comprehensive sanctions that are imposed on targets that are fighting transnational terrorists within their territory should make these groups more resistant to collapse. However, similar sanctions imposed against states that serve as "home bases" or sanctuaries to terrorists should shorten the lifespan of these groups. Our empirical analysis yields results largely supportive of these theoretical expectations.