THE US: With the defection of eight Republican senators, the US Senate has delivered a damaging blow to President Bush's $20.3 billion Iraq reconstruction effort, voting over White House objections to convert half into loans that Iraq would have to pay back at a future date. Conor O'Clery, North America Editor, reports
Beset with deep misgivings about giving billions to a country with the world's second largest oil reserves at a time of record US deficits, a majority of senators rebuffed frantic last-minute appeals from the Vice-President, Mr Dick Cheney, and the Secretary of State, Mr Colin Powell, to toe the administration line.
"I've never seen the secretary of state as engaged as he was on this issue," said Republican senator Mr John McCain, who supported the administration.
The White House argued that making money available as a loan would confirm widespread international suspicions about US motives in Iraq and would make it more difficult to encourage other countries to help pay for reconstruction.
The Senate vote of 51-47 on Thursday, with four Democrats voting for the President, was a rare defeat for the Bush administration in the Republican-controlled chamber and came an hour after the House of Represented voted against a similar proposal.
The Senate stipulated that the $10 billion in loans would become a grant if other countries agreed to forgive debts owed by Saddam Hussein's government, estimated at over $100 billion.
The Republican-controlled House delivered a rebuff of its own, stripping $1.7 billion from the package that had been ear-marked for projects such as a zip-code for Iraq, garbage trucks and business courses for Iraqi entrepreneurs.
Congress members spoke of dismay in many parts of the US over billions being spent in Iraq at a time when near-bankrupt states are cutting back on public services and schools.
The Senate and the House will try to reconcile their differences next week and both houses are expected to approve nearly all of the $87 billion package for reconstruction and military expenditure in Iraq and Afghanistan.
Congress was asked to rush the legislation before an Iraq donors' conference in Madrid next Thursday.
Democratic leaders were divided on whether to support the deal. The House Minority Leader, Ms Nancy Pelosi, said she would oppose the "$87 billion bail-out of a failed Iraq policy" but the Minority Whip, Mr Steny Hoyer, said he would vote for it because "failure in Iraq is not an option".
The package contains $66 billion for military operations with the remainder going to revive infrastructure and to provide funds for hospitals, drinking water, border security, electricity and other services.