The US Senate has voted to convert half of a $20 billion financial package President Bush sought for Iraq into a loan as Congress considered his $87 billion request for Iraq and Afghanistan.
In a setback to Mr Bush, the Senate voted 51-47 last night to make $10 billion a loan to Iraq that the president could forgive if other creditor countries waive repayment of at least 90 per cent of the debts they hold from Saddam Hussein's regime.
Mr Bush has a major political stake in the issue, having personally lobbied lawmakers against seeking repayment of the money to rebuild Iraq, which he said would hinder efforts to stabilise Iraq and undermine an upcoming international donors conference for it.
The House of Representatives rejected an effort to convert some of the reconstruction aid into loans by a 226-200 vote.
That means the issue must be settled when lawmakers reconcile the bills to send Mr Bush a final measure, which he wants before the October 23-24 donors' conference in Madrid.
Both chambers were expected to pass the emergency spending bill today, which also provides $67 billion for military operations in Iraq and Afghanistan.
Senate Democratic Leader Tom Daschle of South Dakota said the vote "sent a strong, bipartisan message" that the administration "must do more to ensure that America's troops and taxpayers don't have to go on shouldering this costly burden virtually alone."
Eight Republicans joined all but four Democrats in voting for the loan measure.
While strongly opposing the move to convert some of the aid into loans, the White House stopped short of threatening to veto the bill if it contained such a provision.
Backers of the loan said since Iraq has the world's second largest oil reserves, their constituents did not see why US tax dollars should build its sewers, schools, prisons and power grid when there were unmet needs at home.
They also said Mr Bush could use the loan to leverage more international help to rebuild the country.
Their plan would provide $10 billion as a grant and $10 billion as a loan, which Bush could convert to a grant if France, Russia, Saudi Arabia and other creditors forgive at least 90 percent of Iraq's roughly $130 billion in debt.
Opponents of the loan said it was only a fig leaf since there was little chance Iraq would repay it. They also said it would heighten suspicion among Muslim countries that the United States invaded Iraq to make a claim on its oil reserves.