President Bush vowed on Tuesday he would never retreat over Iraq because it was part of the war on terror, as another U.S. soldier was killed and signs emerged of financial pain.

An unidentified woman (L) wipes away tears Aug 26, 2003, at Camp Lejeune, N.C., as she stands in front of a helmet sitting on a rifle after a memorial service for the 26 Marines from the 2nd Marine Division that have been killed during the fighting in Iraq.  [AP]

"Retreat in the face of terror would only invite further and bolder attacks. There will be no retreat," Bush said in a speech amid growing criticism in the United States over his Iraq policy as he presses his case for re-election next year.

Bush told the American Legion war veterans group in St Louis, Missouri that Iraq had become a battleground against militant networks since U.S.-led forces toppled Saddam Hussein on April 9.

"Terrorists are gathering in Iraq to undermine the advance of freedom. And the more progress we make in Iraq, the more desperate the terrorists will become," Bush said, echoing aides who say there is evidence of al Qaeda and other foreign fighters in the country.

"Our military is confronting terrorists in Iraq and Afghanistan and in other places so our people will not have to confront terrorist violence in New York or St Louis or Los Angeles," he said.

Bush said the reconstruction of Iraq would require "substantial" time and money and that he would seek to persuade more countries to join the U.S.-led coalition -- although a new U.N. mandate on Iraq has stalled.

The latest American death from hostile fire occurred in a bomb attack on a U.S. convoy. Another soldier died in a non-combat incident. The deaths took losses for U.S. forces to 140 since Bush declared major combat over on May 1. A total of 138 died in six weeks of war to oust Saddam.

A U.S. Army spokeswoman said the convoy was attacked on a road west of Baghdad between the Sunni Muslim towns of Falluja and Ramadi, hotbeds of resistance against U.S. forces.

New figures compiled by the Pentagon put the number of U.S. soldiers killed in action since May 1 at 62.

GUERRILLA-STYLE ATTACKS

Washington, which has some 136,000 soldiers in Iraq alongside 20,000 from Britain and other countries, blames attacks on its forces and other targets mainly on Saddam loyalists. Defense Secretary Donald Rumsfeld said on Monday troop levels were adequate.

Most of the guerrilla-style attacks have taken place in Baghdad and in Sunni areas to the north and west of the capital, from where Saddam, a Sunni, drew much of his support.

U.S. authorities in Iraq have all but exhausted nearly $1 billion in seized assets used to pay Iraqi civil servants, and some administration and congressional officials said on Tuesday extra money may be needed sooner than expected.

One key U.S. legislator, asking not to be named, said after high-level meetings in Baghdad on the funding issue that other ways would be found to pay Iraqi workers' salaries and pensions, but a senior congressional aide called the situation "a mess."

The top U.S. civilian administrator in Iraq, Paul Bremer, was expected to discuss the issue during a series of meetings in Washington this week, officials said.

To alleviate the cash crunch, congressional sources said the White House was considering seeking $2-3 billion extra to shore up funds for Iraq in the near term.

"The president has said that he will work with Congress to ensure that we have the resources necessary to win that battle and do what it takes to help the people of Iraq," White House spokeswoman Claire Buchan told reporters.

The White House is under mounting pressure from both Republicans and Democrats in Congress to act fast. Quick revenues from Iraq's vast oil resources have failed to materialize because of sabotage and looting.

Critics of Bush's Iraq policy have said the war stimulated recruitment by militant groups and that the U.S. mission had become unclear.

Senior Democratic Senator Robert Byrd urged Bush to abandon what he termed a go-it-alone Iraq policy and give other countries "real participation" in the country's reconstruction.

"Our military action in Iraq has forged a cauldron of contempt for America, a dangerous brew that may poison the efforts of peace throughout the Middle East and result in the rapid invigoration of worldwide terrorism," Byrd said in a Washington Post article.

The U.S. 4th Infantry Division, based in Saddam's hometown of Tikrit, said on Tuesday it had launched Operation Ivy Needle, a series of raids backed by tanks, armored vehicles and helicopters to root out resistance in three provinces.

"What we are doing is surgical strikes on more remote areas where we have not had a very large or enduring military presence," Major Josslyn Aberle told reporters in Tikrit.

Saddam himself remains on the run, despite a $25 million price on his head. Senior U.S. officers based in one of Saddam's former palaces in Tikrit say they believe the fugitive dictator is in disguise and moving every few hours.

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