Italy OKd Iraqi Arms Deals, Book Alleges : Publishing: Author supports former Atlanta bank manager’s account of illegal loans before the Persian Gulf War.

The Italian government gave the go-ahead for Italy’s largest bank to finance Iraqi arms purchases before the 1991 Persian Gulf War in order to soften a dispute between the two countries over warships that Iraq had ordered but Italy could not deliver, a book published Saturday alleges.

The explanation of why the Atlanta branch of the government-owned Banca Nazionale del Lavoro loaned $5 billion to Iraq between 1984 and 1989 was advanced by Paul Henderson, former managing director of a British toolmaker financed by Iraq.

Until now, only Christopher P. Drogoul, the former manager of BNL’s Atlanta branch who has pleaded guilty to lying to U.S. bank regulators about the illegal loans, has contended that the Italian government ordered the financing.

The Justice Department, in prosecuting Drogoul, has concluded that BNL was a victim rather than a knowing participant in the scheme.

Henderson based his conclusion on a 1989 conversation he described having with Safa Jawad Habubi, the alleged mastermind behind Iraq’s secret arms-buying network in the United States and Europe.

Habubi, who was recently named by President Saddam Hussein as Iraq’s oil minister, is one of four Iraqi government officials indicted in February, 1991, by a federal grand jury in Atlanta in connection with the BNL case, Like his co-defendants, he is a fugitive.

After leading a buyout, Habubi became chairman of Matrix Churchill Ltd., the British machine tool firm where Henderson was managing director.

Habubi allegedly told Henderson that Iraq ordered four heavily armed frigates and six corvettes in 1980 from Fincantieri, an Italian government-owned shipbuilder, for $2.6 billion.

By 1984, U.S. congressional pressure had blocked delivery of the ships, Henderson said in his book, “The Unlikely Spy.” Italy refused to return a large Iraqi down payment or other money paid at various stages of construction, according to Henderson, but agreed that BNL would provide low-interest loans to Iraq through its Atlanta branch, where the loans would not attract attention.

The Italian Embassy in Washington declined to comment on the report. John Hogan, a special assistant to Atty. Gen. Janet Reno who is overseeing the BNL investigation, said it would not be proper for him to comment.

In a related development, U.S. government documents obtained by The Times show that Washington was involved in discussions with the Italians over the Iraqi ships. However, the documents, while showing there was high-level intergovernmental discussions about the warships, do not say anything about any arrangement between the Italians and Iraqis involving BNL.

Henderson’s book is an autobiographical account of how he and two colleagues at Matrix Churchill were arrested after Iraq’s invasion of Kuwait and then charged with violating British export laws by concealing the military nature of the firm’s sales to Iraq.

At the trial last November, all charges against Henderson and his colleagues were dismissed after Henderson was revealed to have been an informant for British intelligence services and that British Cabinet ministers had cautioned Henderson and other British companies not to disclose the military nature of their exports to Iraq.

The book, written with the assistance of Times staff writer Douglas Frantz, is being published as testimony has resumed before the Scott Inquiry, an official British investigation into the arms scandal that erupted after dismissal of the charges against Henderson and his two colleagues.