Across Europe, response was swift and angry Wednesday to the U.S. order barring firms based in important allied countries - opponents of the Iraq war - from bidding on Iraqi reconstruction projects.

Russia suggested it would not restructure Iraq's debt. Canada threatened to stop sending aid to Baghdad. The European Union said it would study whether global trade rules had been violated.

French President Jacques Chirac, left, and German Chancellor Gerhard Schroeder, right, cross the courtyard of the Elysee Palace on their way to the nearby Hotel Marigny to have lunch, Tuesday, Dec. 9, 2003 in Paris.  [AP]

Germany, another leading opponent of the war, called the decision "unacceptable," and government spokesman Bela Anda said it went against "a spirit of looking to the future together and not to the past."

Critics said the policy could discourage countries from helping to rebuild Iraq and complicate American efforts to restructure Iraq's estimated $125 billion debt, much of it owed to France, Germany, Russia and other nations whose companies are excluded under the Pentagon directive.

French President Jacques Chirac, German Chancellor Gerhard Schroeder and Russian President Vladimir Putin all raised the contracting issue during previously scheduled telephone calls with President Bush on Wednesday, said White House spokesman Sean McCormack.

Bush "indicated he'd keep lines of communication open," McCormack said - but other White House officials made it clear the administration has no intention of reconsidering the policy.

The White House says countries wanting a share of the $18.6 billion in reconstruction contracts in the 2004 US budget must participate militarily in the postwar effort.

"Prime contracts for reconstruction funded by US taxpayer dollars should go to the Iraqi people and those countries who are working with the United States on the difficult task of helping to build a free, democratic and prosperous Iraq," White House spokesman Scott McClellan said.

He said companies from anti-war countries could compete for contracts being financed by a separate international fund that the White House estimates will be worth $13 billion. Also, the ban does not prevent companies from winning subcontracts.

French telecom giant Alcatel, for example, won a subcontract to carry out a third of the two-year deal awarded to Egyptian firm Orascom to build a mobile phone network in central Iraq.

Such prospects, however, did little to assuage international anger over the directive issued by Deputy Defense Secretary Paul Wolfowitz.

Canada's deputy prime minister, John Manley, said the decision would make it "difficult for us to give further money for the reconstruction of Iraq." Canadian officials said the country has contributed $225 million thus far.

Paul Martin, who becomes Canada's prime minister Friday, said the Pentagon decision was "really very difficult to fathom" and that he would raise the issue with U.S. officials.

"We noted with astonishment today the reports, and we will be speaking about it with the American side," German Foreign Minister Joschka Fischer said after talks with his Russian counterpart, Igor Ivanov.

In Moscow, Deputy Foreign Minister Yuri Fedotov said the directive "will hardly foster the mobilization of the international community" to rebuild Iraq, "more likely the opposite," according to the ITAR-Tass news agency.

"We suspect that in substance it contradicts the international principles for international tenders for public projects, although the United States in particular always calls for observing these principles," said Ludolf von Wartenberg, general manager of the Federation of German Industry.

In Brussels, Arancha Gonzalez, trade spokeswoman at the European Commission, said the EU was asking the United States "to provide us with information so we can see whether or not their commitments" under the World Trade Organization "have been respected."

The Pentagon directive said restricting contract bids was necessary to protect essential security interests. WTO rules allow for exemptions based on national security.

"We would want to know in the specific circumstances whether or not this is related to national security," Gonzalez said. One contract is to equip the new Iraqi army and "why should it be excluded if it is purchasing T-shirts and socks?" she asked.

Despite the criticism, it was unclear how many major foreign companies were prepared to launch major reconstruction projects in Iraq as long as the security situation remains volatile.

Many international organizations, including the United Nations and the international Red Cross, have withdrawn foreign staff from Iraq because of the violence.

On Monday, a South Korean company announced it would withdraw 60 workers restoring power lines in Iraq after gunmen killed two of its engineers working on a U.S.-funded project.

Several American contractors have been killed by Iraqi insurgents, and last month a Baghdad hotel used by Halliburton subsidiary Kellogg Brown & Root was rocketed. One U.S. contractor was injured.

Hochtief AG, a German construction giant, said it was not interested in projects in Iraq "as long as the situation remains so dangerous."

Nevertheless, critics said the policy was another example of Bush administration unilateralism that has alienated many longtime allies.

The senior Democrat on the Senate Foreign Relations Committee, Sen. Joseph Biden of Delaware, called the new policy a "totally gratuitous slap" that "does nothing to protect our security interests and everything to alienate countries we need with us in Iraq."

Democratic presidential candidate Howard Dean cited the policy as an example of the Bush administration's "confrontation" approach "all over the world."

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