Iraq OKs U.N. Extension of Humanitarian Aid 6 Months : Persian Gulf: But Baghdad, faced with a winter of disease and malnutrition, still rejects a deal to sell oil for food.

Pressed by the prospect of disease and malnutrition with winter setting in, the Iraqi government agreed Sunday to extend U.N. humanitarian services in the war-ravaged countryside but continued to reject a deal to sell oil for food.

U.N. envoy Prince Sadruddin Aga Khan announced at a Baghdad news conference that U.N. operations would be extended for another six months beginning in January. The agreement will permit the U.N. Children’s Fund and other U.N. agencies to provide food and medical care across the country, including the politically sensitive Kurdish northern region and the Shiite Muslim south.

Extension of the agreement was the prime goal of Prince Sadruddin’s mission to the Iraqi capital, but he evidently lobbied hard--and unsuccessfully--for President Saddam Hussein’s acceptance of the oil-for-food proposal that Baghdad has defiantly rejected on political grounds.

The prince, U.N. Secretary General Javier Perez de Cuellar’s personal representative for refugee relief in the wake of the Gulf War, remarked sharply on the regime’s resistance, verging away from his usual diplomatic tone.

“The government of Iraq may be held responsible for failing to take advantage of the window of opportunity--narrow and constricting though it may be--afforded by the arrangements for oil exports and imports of essential needs,” he told reporters in Baghdad, according to dispatches monitored here. “In the political sphere, one of the parties to the recent conflict will continue to be blamed.”

The proposal is embodied in Security Council Resolution 706--a successor to the cease-fire resolutions--which would permit Iraq to export $1.6-billion worth of oil over a six-month period to raise funds for importing needed food, medicines and other commodities. However, the measure requires that the revenues be paid into a U.N.-controlled escrow fund and that nearly a third be set aside to cover war reparations for Kuwait and other states damaged in the Gulf War and to pay for U.N. costs in providing relief and in destroying Iraqi stocks of weapons of mass destruction.

Hussein and his top officials have scorned not only the idea of reparations and of other escrowed funds but also a U.N. requirement that the distribution of any foods and medicines bought with oil revenues be carried out under strict international supervision.

Hussein personally kicked off a rhetorical campaign against the proposal last month at a conference of Arab loyalists in Baghdad. Appearing in combat fatigues, which he has again begun wearing after a brief postwar phase of suit and tie, the 54-year-old strongman declared:

“It should be clear to you that Iraq could live under sanctions for 10 to 20 years without asking anything from anyone. . . . Iraqis are not ready to lose their dignity and honor for an extra piece of food.”

The Iraqi leader was also hesitant to approve the extension of the U.N. humanitarian program, according to Western diplomats, in part because it includes the continued deployment of 500 U.N. guards--armed with pistols--to provide security for the relief workers. Many are deployed in Dahuk and other cities in the Kurdish region of northern Iraq.

The guards, dressed in blue uniforms and baseball caps, present little military threat and see their main role as witnesses to trouble when it breaks out--international watchdogs against clashes between Hussein’s army and Kurdish guerrillas in sectors of instability. But Baghdad views them as another incursion on its sovereignty.

On another matter in dispute, Prince Sadruddin called on more Western countries to release Iraqi funds that were impounded abroad when Hussein’s troops invaded Kuwait in August, 1990. The prince underlined his view by leaving Baghdad later Sunday in his private jet with British businessman Ian Richter aboard.

Richter was freed by Iraqi authorities Saturday after serving nearly six years of a life term on bribery charges, and the British Foreign Office promptly announced the release of $125 million of the estimated $640 million in impounded Iraqi assets blocked by the British government.

“I am certainly looking to the unfreezing of more assets,” the U.N. envoy told reporters.

Baghdad officials say that more than $4 billion in Iraqi assets were impounded at the outbreak of the Gulf conflict and claim that 75% were held in American banks. They demand the release of the funds so they can be used to ease the conditions of the 17 million Iraqis.

Western governments have refused to turn over the money until Baghdad complies fully with the cease-fire terms of the war. Iraqi stonewalling and misleading of U.N. teams assigned to inventory and destroy nuclear, chemical, biological and rocket weapons systems is the most contentious example of noncompliance. Western governments also appear reluctant to unfreeze funds while the Baghdad regime continues to repress the Kurdish and Shiite populations.

On departing, the prince pointed to the problems in Kurdish areas, where the United Nations has feeding and medical programs. “I wish to call for maximum restraint so that negotiations towards a political solution that have been under way for some time can move forward without further armed conflict,” he said.

Kurdish spokesmen say Iraqi troops are advancing on Kurdish cities in the north, although widespread fighting has not resumed.

As for the standoff on the oil-sales resolution, the prince said the impasse between Baghdad and the Security Council has one clear victim: “The ultimate losers will be the Iraqi people.”

Appealing directly to Hussein and his regime, the envoy told reporters, “We need funding, and for funding I would be grateful if Iraq wold consider exports of oil.”

But the Hussein regime has drawn a hard political line on the issue so far. In Baghdad, Trade Minister Mohammed Mehdi Saleh has carried the ball, telling foreign correspondents again and again that the Iraq people will live on “dates and barley and anything we have to defend our freedom.”

As living conditions worsen in the country and food supplies continue to dry up, the strategy becomes risky in terms of public order. And many Western diplomats are convinced that Iraqi pride is not the issue. More important than sovereignty and U.N. supervision of food distribution, these analysts say, is the revenue that Hussein’s regime would lose to reparations.