U.S. Officials Point Fingers in Iraq Loan Case : Inquiry: Top CIA and Justice Dept. personnel angrily dispute who is to blame for giving prosecutors, judge misleading information.

Senior officials from the Justice Department and CIA are engaged in an angry dispute over who is to blame for providing misleading information to prosecutors and a federal judge in a case involving billions of dollars in illegal loans to Iraq, government sources said Friday.

CIA lawyers told the Senate Intelligence Committee in a closed-door session on Thursday that a senior Justice Department official instructed the agency not to correct a misleading document that was sent to the prosecutors and judge in Atlanta in the Banca Nazionale del Lavoro loan scandal, the sources said.

But the Justice Department official, Deputy Atty. Gen. Lawrence A. Urgenson, disputed the CIA claim when he appeared in secret before the committee on Friday, according to the sources. Urgenson testified that the proper information was sent to U.S. District Judge Marvin H. Shoob and that the Justice Department had done nothing wrong, the sources said.

Attempts to reach CIA officials for comment Friday were unsuccessful. Paul McNulty, the Justice Department’s chief spokesman, said that the department found it “unbelievable” that the CIA would make such an accusation and that the department had provided all the information under its control to the judge and prosecutors in Atlanta.

The unusual dispute between two of the Administration’s most powerful agencies is certain to fuel speculation in Congress that there has been a wide-ranging cover-up in the bank case. Shoob and congressional Democrats already have accused the Justice Department of interfering with the efforts of federal prosecutors in the BNL case.

The controversial case involves $5 billion in loans to Iraq between 1985 and 1989 by the Atlanta branch of BNL, which is owned by the Italian government. The loans, some of which paid for Iraqi military projects, were discovered in an FBI raid in August, 1989.

Prosecutors contend the scheme was engineered solely by employees of the Atlanta branch, operating without the knowledge of officials at its Rome headquarters. They have said that a three-year investigation found no evidence that Rome knew of the loans.

However, the CIA’s station chief in Rome sent four cables to the agency in September and October of 1989 indicating that senior bank officials in Italy were aware of the activities in Atlanta long before the FBI raid.

The four cables had not been discovered in CIA files when the agency wrote a classified letter to the Justice Department on Sept. 4. The letter was in response to questions about what the agency knew of the BNL case in preparation for the sentencing hearing for the ex-branch manager, Christopher P. Drogoul.

The Sept. 4 letter said that the CIA learned in December, 1989, and January, 1990, from public information, meaning newspapers, that BNL in Rome may have known of the loan scheme.

Less than two weeks later, however, the agency discovered the four cables, according to the government sources. Those cables provided much stronger evidence that BNL-Rome knew of the loan scheme.

CIA lawyers testified before the Senate on Thursday that Urgenson told them not to change the letter to reflect the new information and that it was sent as originally written to the judge and Atlanta prosecutors, according to the sources. The CIA said that Urgenson acted after consulting Robert S. Mueller III, head of the criminal division at the Justice Department.

McNulty, the Justice Department spokesman, acknowledged that the letter was sent unchanged, but he insisted that the relevant cables also were provided to Shoob by the department. In addition, he said that department lawyers offered to explain the inconsistencies to the judge, but that he did not take them up on the offer.

Sen. David L. Boren (D-Okla.), chairman of the intelligence committee, began an investigation and received subpoena power after committee staffers uncovered the discrepancy. The CIA also has opened its own internal investigation.

“Our inquiry . . . will continue until we are satisfied that we have a clear record on the CIA’s action in this matter and any related action by other government departments, including communications between the agency and the Justice Department,” Boren said Friday.

After two days of closed-door hearings, however, sources close to the committee said that the dispute may be referred to the Senate Judiciary Committee, which has jurisdiction over the Justice Department.

For the Bush Administration, the feud comes at a critical time. Democratic nominee Bill Clinton urged this week that a special prosecutor be appointed to investigate whether the Administration covered up any of its dealings with Iraq before the war. The BNL case has been at the heart of the controversy over whether there was a cover-up.

Last month, Atty. Gen. William P. Barr defended the department’s handling of the case.