Bush Approves $542 Million for Panama : Foreign aid: Further outlays are planned to help the country recover from U.S. sanctions and the December invasion.

President Bush signed into law Wednesday the first $542 million of a $1-billion economic recovery package for Panama, with plans to finance the remaining $500 million in cash aid by diverting money from the defense budget.

The measure, which was pushed through Congress in less than three weeks, is designed to help Panama revive its economy after 21 months of U.S. economic sanctions and the December invasion that toppled strongman Manuel A. Noriega.

The legislation signed by Bush provides $42 million in emergency cash and restores $500 million worth of trade benefits and loan guarantees for Panama that were cut off in 1988 when the United States imposed its sanctions.

Bush has said he will submit additional legislation this month for another $500 million in assistance intended to create new jobs, rebuild roads and bridges and inject new cash into Panama’s once-flourishing banking system.

He has said repeatedly that he would finance the additional $500 million by making offsetting cuts elsewhere in the federal budget, but he has given no hint where those reductions would be made.

However, officials said the Administration has decided to finance the entire $500 million through reductions in military spending--by making fewer purchases for the national defense stockpile and by cutting outlays for weapons testing and military housing.

The Pentagon has come under sharp criticism recently for stockpiling excess equipment and supplies. A recent report by the Senate Budget Committee charged that the Pentagon has at least $30 billion in spare parts and uniforms on hand that it does not need.

Officials said the new plans call for reducing new purchases for the military stockpile by about $215 million and cutting small amounts from previously proposed spending for military construction projects, testing and evaluation, and minor weapons procurement programs.

Meanwhile, U.S. officials said that Panama, reversing its earlier position, has acceded to U.S. demands that it write tough new banking-secrecy laws to prevent further use of its banking system for money laundering by international drug traffickers.

The new Panamanian government previously had refused to overhaul the lax banking laws in effect during the Noriega regime, frustrating U.S. officials.

Angry U.S. lawmakers warned Panama about the need to end money laundering during the debate on the aid package last week. Meanwhile, Administration officials called in Panamanian representatives to express their displeasure over the issue.

Since then, however, Carlos F. Rodriguez, Panama’s U.S. ambassador, has assured top U.S. officials that the government of President Guillermo Endara will enact “whatever new laws . . . might be necessary” to crack down on money laundering.

In a document made available to The Times, Rodriguez said the pledge had been approved personally by Endara. A joint U.S.-Panamanian panel of banking experts is studying the issue.

The restored trade benefits will enable Panama to ship goods to the United States duty-free and to claim lower tariffs and new loan guarantees under the Administration’s Caribbean Basin Initiative, beginning in early March.

The legislation also restores Panama’s eligibility for loan guarantees from the U.S. Export-Import Bank and for investment guarantees by the government-sponsored Overseas Private Investment Corp.

During Wednesday’s signing ceremony, Bush expressed gratitude that Congress had rushed the aid package through, hailing what he called “strong bipartisan support for the task of helping Panama rebuild and strengthen its economy and its democracy.”